From the reckless to the foolhardy is but a step.
A survey by the Consumer Federation of American found that low-income and minority home buyers are more likely to choose adjustable-rate mortgages, even though they're less likely to understand the potential risks. . . .Muckity-muck economists say that ARMs make sense if you plan to leave your house before the rate adjusts. The thing is, however, that if you're buying during a housing bubble, you may very well be setting yourself up for a negative equity situation just when you had planned on selling. If you get in with a low downpayment (and the loan-to-price ratio is rising in bubblicious California) and are paying only interest for the first few years, you're really getting ready to be screwed. You won't own any equity at all worth mentioning, but that nice fat $300,000 loan will still be there.
the CFA survey suggests that savvy, well-heeled home buyers aren't driving the demand for ARMs. When asked what kind of mortgage they would prefer if they were going to buy a home in the next month, 33% of those with incomes under $25,000 said they would choose an adjustable-rate mortgage. Only 20% of those with incomes over $50,000 preferred adjustable rates.
A more likely reason for the growth of adjustable-rate mortgages, which now account for nearly a third of mortgages, is the rising cost of buying a home. . . .
Many low-income and first-time home buyers are opting for adjustable-rate mortgages because they can't afford a fixed-rate mortgage, says Keith Gumbinger, vice president of HSH Associates. "They're being forced into ARMs by necessity, not choice," he says.
Some of those home buyers also are layering other options on their mortgages to lower their out-of-pocket costs even more, Gumbinger says.
Those features include low down payments and the option of making interest-only payments during the first five years. All of these layers leave little margin for error.