A few years ago, I bought my house using a 5 year ARM. With the credit crisis upon us and my house having devalued, I wish I had the foresight to get a fixed 30 loan. Nevertheless, I don’t have it bad. With 2.5 years left on the fixed portion of my loan, I will probably sell the house before it resets. More importantly, my loan resets are capped a maximum of 2% per year. Although it would hurt, I could make the payments if I had to.
In my reading about the sub-prime fiasco, I learned that most sub-prime ARM’s do not have a cap of any kind. Considering the poor credit history of the borrowers, the rates can be expected to reset into the 18-20% range.
Frankly, I am coming to believe sub-prime borrowers should never be allowed to have an ARM. Because these borrowers have/had money problems, allowing them to face enormous interest rate risk is irresponsible.