Flexible Payment ARM

See: Adjustable Rate Mortgage.

ARM stands for “adjustable rate mortgage.” Instead of having the same mortgage rate for the life of the loan (say, 5% every year of your 30-year mortgage), ARM loans have a rate that fluctuates based on prevailing interest rates. So if the prime rate goes up, so does your mortgage payment.

The flexible payment plan allowed consumers to pick from four different payment sizes each month. The lowest amount didn’t cover the interest amount, meaning the loan effectively got bigger if the homeowner chose that amount consistently. The highest possible payment treated the loan as a 15-year mortgage, allowing the homeowner to pay off the loan faster.

While the structure theoretically gave borrowers a lot of flexibility, in practice the contracts included a lot of fine print. Regulators turned sour on the product. They felt consumers were being hurt by teaser rates, limitations on how often the lower payments could be used and the fact that the loan's lowest payment tier caused the loan to actually grew in size each month.

Meanwhile, the loan structure reached its peak popularity headed into the financial crisis of 2007-2008. By the time the dust settled in the housing market after that economic whirlwind, a lot of people with flexible payment ARMs found out that they owed more on the mortgage than the house was worth.

Eventually, the Consumer Financial Protection Bureau (CFPB) issued new qualified mortgage standards. These rules effectively killed the Flexible Payment ARM market.

Related or Semi-related Video

Finance: What is Adjustable-Rate Mortgag...17 Views

00:00

Finance allah shmoop What is adjustable rate mortgage or arm

00:08

Well here's an arm and here's a leg and that's

00:11

What Renting the money to buy a home costs you

00:14

Yeah Okay Eight r m stands for adjustable rate mortgage

00:17

The rate well that's The interest cost of the money

00:20

or the cost of renting that money to buy the

00:23

home Well the rate isn't it fixed in this case

00:26

like five point seven percent for thirty years Where you

00:28

know in advance that your monthly payments going to be

00:31

nine hundred forty three bucks a month or whatever it

00:33

is that would be a fixed mortgage a fixed number

00:37

You can count on it for all three hundred sixty

00:40

payments And then the house is all yours So that's

00:43

fixed then what's adjustable like yes the interest rate changes

00:47

But how does it change Well in a standard arm

00:50

there is some global standard on which the rates are

00:53

often price like lie bore the london interbank borrowing offering

00:57

rate It's one of the key things that price is

00:59

the cost of renting money all around the world with

01:02

the actual rate of libel or is generally reserved for

01:04

banks like super cheap cost of renting money to banks

01:08

who are very likely to pay back the money with

01:11

no hassle that rate is more or less what banks

01:14

pay for running the money along with blue chip customers

01:16

in real life The banks then mark up a premium

01:19

on top of the rate that they're paying to rent

01:22

the money to themselves And then they resell or re

01:26

rent that money teo their prized customers So the pricing

01:30

of bank my views in renting money to joe six

01:33

pack could be something like lie boer plus three percent

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or three hundred basis points So if libel or is

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it didn't say two and a half percent today the

01:43

adjustable rate might be five and a half percent and

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all that's great honor given alone It might mean that

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for a while you're paying seven hundred twelve dollars a

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month for your house payment wonderfully cheap and in fact

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banks market these low rates initially to help people be

01:58

able to afford tto by that new home and live

02:00

of the dream You know the american dream usually with

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an arm there's a teaser rate that starts really low

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Like at live or live or plus ten basis points

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or something like ridiculously cheap for six months or a

02:14

year something like that Then it has an incremental set

02:17

of step ups in interest costs and venit adjust with

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the markets usually upward maybe upward by a lot Remember

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there's a reason it's called a teaser rate but then

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if we get inflation or a you know just bank

02:32

nervousness for there are weird effects from brexit or the

02:35

volume of transactions going through london or something weird happens

02:39

Well then the liquidity drops and interest rates rise So

02:44

now lie board goes up and up and up to

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four and a half percent and wealth contractually in your

02:50

mortgage paperwork you have to pay live or plus three

02:53

hundred basis points no matter what So now that's seven

02:56

and a half percent interest on the dough you borrowed

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and well we're that toe happen It's likely that your

03:02

monthly payment has skyrocketed from seven hundred twelve dollars a

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month is something more like twelve hundred dollars a month

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or more Can you handle that big of a payment

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Well have you done a fixed rate loan at nine

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Hundred forty three dollars a month Well you'd still be

03:15

paying on that number but you rolled the dice with

03:18

an arm and now you owe big bills There go

03:22

that arm and a leg thing we warned you about 00:03:26.033 --> [endTime] eh

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