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Brace yourself for a shot in the ARM (adjustable-rate mortgage)

When rates start to slide up and down, adjustable-rate mortgages will feel it
  • Since the ARM's invention, there has been no period of sustained, steep increase in short-term rates. We won't get away with that forever.

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It has been a while since adjustable-rate mortgages (ARMs) were topical. Adjustable-rate mortgages have been a sleepy market ever since the Fed went to zero eight years ago, at about the same time that extensive ARM abuse in the bubble stopped. And their basic structures are far older than the experience of most borrowers today. Where did ARMs come from? Modern ARMs were invented in 1980 to protect banks and savings-and-loans companies (S&Ls) against the hyper-active Paul Volcker-led Fed. Short-term rates then ran way up into the teens, as did the cost of money to banks. Lenders had to have some way to protect themselves by transferring the cost of rising rates to borrowers. Interest rates have fallen ever since, which has distorted the consumer view of ARMs. Since their invention, there has been no period of sustained, steep increase in short-term rates. We are not going to get away with that forever. How do you know where rates will go? ARMs adjust based on an “ind...