LOWER-INCOME AND MINORITY consumers are most likely to prefer adjustable rate mortgages (ARMs), yet they are least familiar with the risks that these mortgages present, according to a recently released survey. The survey of 1,015 representative adult Americans was commissioned by the nonprofit Consumer Federation of America.
The respondents who said they would choose an ARM tended to be younger, less educated, less wealthy, and less familiar with how changes in interest rates can affect mortgage payments on ARMs. Also, a higher percentage of Hispanics and blacks favored ARMs than whites.
The appeal of an ARM is the low initial interest rate. The danger is that an increase in the rate could hurt some families. Traditionally, ARMs were preferred by affluent home buyers who could afford a higher monthly payment if the interest rate went up. Now, about one-third of all buyers choose ARMs. One of the reasons, says the association's executive director, Stephen Brobeck, is that some lenders are pushing them to everyone. The lower interest rate allows some people who might not have qualified for a mortgage to buy a house, which earns the lenders more money.
One industry veteran, however, says the survey is flawed, especially as it relates to determining that consumers do not comprehend the risks.
“If I called you and said, ‘If you took an ARM for $200,000 at 6 percent and it jumped to 8 percent, how much would the payment go up?' could you answer [that]?” asks Doug Duncan, the Mortgage Bankers Association's chief economist. “That's an unfair way to ask if consumers understand ARMs and to conclude that they don't.”
Duncan says the survey also tries to brand all ARMs as dangerous. The real danger, he says, is consumers who don't understand what they're buying. It's crucial for borrowers to ask sufficient questions about the rates and terms.