ARMs to Benefit from Loose Monetary Policy

Headlines are telling us the economic impact of single family housing is subdued because first time home buyers are scarce. Perhaps the pool of single professionals, newlyweds and young families is too focused on fixed rate mortgages. Adjustable rate mortgage products knows as ARMs may be discounted by their baby boomer parents as too risky. But today’s move by the European Central Bank (ECB) to cut rates by -0.10 may indicate that stateside interest rates may not increase for the foreseeable future. The deflation risk affecting central bank policy around the developed world should make an ARM a good choice for first time buyers with plans to move up in coming years.

Deflation causes your money to be worth more tomorrow than it is today. It discourages spending, kills economic activity and renders traditional monetary policy impotent. Traditional fixed mortgages won’t benefit from continued deflation fighting. On the other hand, an ARM tracking short-term rates will benefit from further global money creation which could translate into very low rates for many years to come. ARMs can be leveraged to purchase a larger, more expensive home or achieve a lower mortgage payment.

Fear the reset button –

There is no free lunch. Though adjustable rate mortgages may offer a shortcut to home ownership ambitions, once the rate resets, the increased payment may cause financial hardship. An ARM loan today is tied to an index like LIBOR or a current maturity Treasury. Should that index rise significantly, your mortgage payment will rise too. If your income stays flat, or your spouse loses their job, you may find yourself having to sell your slice of the American dream.

Takeaway –

Thanks to global deflation fears, rates don’t appear to be rising in the near term. Tight lending standards should keep unqualified buyers away from buying unaffordable McMansions with glimmering granite counter-topped kitchens. For qualified buyers who don’t plan to live in their homes more than 10 years, today’s low cost ARMs could be a great way to get into a home. Those same buyers should keep in mind that spending more than 30% of gross income on a home can quickly make them feel like house poor slaves to an ever increasing mortgage payment.


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