Adjustable Rate Mortgage

Dave explains why banks started doing adjustable rate mortgages.

QUESTION: Listener asks why banks do adjustable rate mortgages, and how they came to being.

ANSWER: I was in the real estate business in 1978, and that year fixed rates went to 10% for the first time in history. A big fuss was made about it, and rates got to a high of 17% by 1981. With that, interest rates on money market accounts went to 10%. Banks were paying 10% to 12% on savings account and only making 5% back from their other products. In the middle of all that, the banks decided to prevent themselves from losing money in the future. As a result, the adjustable rate mortgage was born.

With the ARM, the bank offers you a lower interest rate to get you in, and when rates adjust, they adjust up. It transfers the risk to the consumer. If you currently have an adjustable rate mortgage, refinance now. NEVER get an adjustable rate mortgage.

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