The adjustable-rate mortgage (ARM) is one of the most feared products in the financial industry, says Derrick Strauss. However, these oft-misunderstood mortgage options offer most homebuyers a favorable alternative to the perceived safety of the 30-year fixed-rate loan.

ARM: The strong arm of the recession?

Derrick Strauss points out that the adjustable-rate mortgage may have contributed in part to the economic downturn of 2007. This is, as Derrick Strauss explains, because people with very little experience managing their mortgage budgets were given loans they did not fully understand. In fact, says Derrick Strauss, the real estate bubble burst was more caused by irresponsible lending practices and overinflated prices than the loans themselves. Most of these high-risk mortgages have been pulled from market, reports Derrick Strauss.

The hybrid

According to Derrick Strauss, the adjustable-rate mortgage is actually an unfairly stereotyped product. Derrick Strauss points out that most modern ARMs have an expanded initial period at a fixed rate. Derrick Strauss explains that a typical ARM, now usually referred to as a hybrid loan, may start out anywhere from three to five years fixed before it hits the dreaded rates roller coaster. For homebuyers who plan to sell before this period is over, Derrick Strauss explains that an adjustable-rate mortgage makes sense. Over a seven-year period, Derrick Strauss explains that a typical 7/1 Hybrid ARM may save upwards of $12,000 on a moderately priced home.

Risk vs. reward

Derrick Strauss says that there are some risks involved with the adjustable-rate mortgage. Borrowers are only guaranteed a fixed rate for a specified time frame before they must either deal with fluctuating house payments, refinance, or close the loan completely by selling the property. This, explains Derrick Strauss, is where a little planning makes a big difference in the long run. For example, an older couple looking to retire within 10 years and downgrade to a condo may choose an adjustable-rate mortgage and save a considerable amount toward their retirement fund, says Derrick Strauss. An ARM may not be an ideal loan for a young couple who might need to live off of one income when it’s time to start a family.

Prepare for the worst

Derrick Strauss emphasizes that even buyers who are certain they can get out of an adjustable rate mortgage should take a bit of precaution and prepare for an enlarged house payment. Putting aside even a small portion of the initial mortgage savings each month can help offset higher costs later, says Derrick Strauss. This way, if acquiring a new mortgage is not an option, there will be a financial cushion to absorb any potential sticker shock.

Derrick Strauss explains that a worst-case scenario isn’t even as devastating as people have been led to believe by mass media. On a similar house payment as mentioned above, a 6.125 percent increase comes out to a little less than $300 per month. While Derrick Strauss understands that this is definitely not desirable, a bit of education in regards to what exactly an adjustable-rate mortgage is, coupled with proactive future planning, can help prevent financial crisis later.

Derrick Strauss is the marketing manager for All Western Mortgage, a Colorado-based real estate lending agency spanning 22 states.