It Makes No Sense

We have the lowest mortgage rates in 40 years and no one wants to lock in those rates by taking out a 30 year mortgage. Instead, they go for the temporarily cheaper payments of 5/1 ARMs and negative amortization loans.

“Take a $385,000 house, assume a 20% down payment ($77,000) and a 30-year, fixed-rate mortgage at 5.75%. You, the homeowner, would write a check for $1,800 a month. Over five years you'd wind up paying the bank a cumulative $108,000.

Now take the same $385,000 house, the same 20% down payment and the same 30-year maturity. But instead of a fixed-rate loan, assume a 5/1 interest-only ARM. For five years you pay a fixed rate--say 5.1%. That's $1,300 a month. Over the five years your cumulative payment would amount to only $78,000.

So the case is settled? Not quite. Starting in year six, the ARM buyer faces two moments of truth. His interest rate is adjusted, or "reset," and only then does he start to pay down principal. And note that over these first five years the ARM buyer has built up no equity, whereas the fixed-rate, amortizing borrower has amassed $22,000.”