The Comeback of the Adjustable Rate Mortgage

Adjustable-rate mortgages, also known as ARMs or variable-rate loans, have been out of favor with many people in recent years because of the low interest-rate environment and the perception that rising payments on ARMs contributed to foreclosures during the recent financial crisis. But with new federal disclosures and protections for consumers, some borrowers are wondering if they should consider an ARM if the initial interest rate is significantly lower than what’s being offered for a 30-year fixed-rate loan. Here are ideas to keep in mind when choosing between the two types of loans.

Decide how long you plan to be in the home. In general, borrowers who are certain they will move out of a home within a few years are more likely to benefit from a low-rate ARM than those who plan to stay in the home for as many as 30 years. “Because it’s difficult to predict the future, seriously consider what could happen if you agree to an ARM and then stay in the home much longer than you expected,” said Luke W. Reynolds, Chief of the FDIC’s Outreach and Program Development Section.

Remember that the features of adjustable-rate mortgages can differ considerably so it pays to comparison shop. For example, some ARMs may have a fixed rate for 10 years before the interest rate could “reset” (change) and do so again every year thereafter. Other ARMs may start to reset after three years. The maximum rate increases, both periodic as well as during the life of the loan, also can vary significantly between lenders and loan products. In addition, the initial rate on an ARM may be “discounted” — to make it more attractive to you — and that means your payments are very likely to increase substantially beginning with the first reset period.

Be comfortable that you’ll be able to make your loan payments on an ARM if the interest rate soars to the highest level it could go while you own the home. The lender must disclose to you both the maximum interest rates and the resulting payments for an ARM within three business days of receiving your complete application.

“Factor in the possibility that your income may not increase but your property taxes and insurance likely will,” said Jonathan Miller, Deputy Director in the FDIC’s Division of Depositor and Consumer Protection. “And don’t assume that you will have the option to refinance the loan or sell your home to escape higher payments down the road.” For example, he said that given the low mortgage interest rates over the past few years it is reasonable to expect higher rates in the future, and that could mean refinancing your ARM may not significantly lower your payments.

Carefully review the disclosures from your lender and ask for help if you don’t understand something. Make sure that each disclosure reflects the terms you saw advertised or the lender quoted before you applied. Also keep these disclosures and compare them to the loan agreement you receive before you go to closing. In certain circumstances, the lender must provide you with an updated copy of the disclosures three business days before you close.

If you want the stability of a fixed-rate mortgage, research cost-saving alternatives. You may have options for reducing interest costs over the life of the loan by, for example, making mortgage payments on a bi-weekly basis instead of monthly or increasing your payment a little each month.

If you plan to stay in the home for the long-term, you also could consider paying the mortgage lender some “points” at closing. Each point equals one percent of the loan amount, and it is a fee to lower the interest rate on the loan. Again, shop around to make sure you are receiving an adequate reduction in rate for each point paid.

For additional ideas, see our tips on finding and managing a home loan in the Summer 2012 FDIC Consumer News (www.fdic.gov/consumers/consumer/news/cnsum12/yourmortgage.html), and search for more information from the federal government at www.mymoney.gov.

About Union State Bank

Honesty, integrity, commitment; hometown values that are our way of doing business. At Union State Bank our mission is to be the preferred, locally owned bank committed to providing exceptional service to achieve long lasting customer relationships. The Union State Bank has been serving the banking needs of our community since 1911, when the Farmers and Merchants State Bank was formed in Kewaunee, Wisconsin. The Bank’s slogan was "A Bank of the People, By the People and For the People - A Bank For All The People," and invited the community "if you are not a customer, become one, and we assure you that your interests will be protected in every legitimate manner." In 1934 the Farmers and Merchants State Bank consolidated with the Dairyman’s State Bank, which was located across the street, and the Union State Bank was formed. It was reported in the local paper that "The union of two banks is particularly for the benefit of depositors. All the experience, ability and training gained through many years of banking service is combined here primarily for your protection. The confidence that has been cultivated over past years is now being strengthened." We have continued to grow through the years, and slogans used include "Union State Bank, where rail and water meet" and "Union State Bank, the bank and a half, we give you our all and then some." We currently have four locations. We have two offices located in Kewaunee, Wisconsin which is along the shores of Lake Michigan, approximately 20 miles east of Green Bay. We also have an office in Green Bay, Wisconsin and an office in Two Rivers, Wisconsin. Our main office is located at 223 Ellis Street in Kewaunee. Our second Kewaunee location was established in 1996 and is in the Piggly Wiggly grocery store. Our Green Bay office was established in 1987 and in September of 1999 we completed an addition to that location. In April 2004 we opened our office in Two Rivers. Originally situated inside the Pick 'n Save grocery store, the Two Rivers office was relocated to a brand new building at 2221 Lincoln Avenue on April 21, 2009. We have certainly grown and changed over years, but one thing remains constant - our commitment to our customers. We are proud to be the only independent bank in Kewaunee, which allows us the ability to offer a wide array of services that are designed to meet the individual needs of our customers. We offer full-service banking from an experienced, dedicated staff of full-time employees. We still believe in the "personal touch," and enjoy getting to know our customers. Even though we are a small, locally owned bank, we offer the latest in technology services, including our website and 24-hour account access via our "Union Access" line. We are proud of our long history of high-quality, personalized service, and invite you to become a customer of Union State Bank. See how "We Make the Difference" for you.

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