ARMs pose risks to the uninformed

Lower income and minority home buyers are most likely to prefer adjustable rate mortgages, yet they often misunderstand the risks of these loans, according to a new survey by Consumer Federation of America. The lack of financial knowledge could make them vulnerable to rate increases.

The survey, conducted in early July, showed that the 25% of respondents who say they prefer adjustable rate mortgages, or ARMs, are younger, poorer and less educated than the two-thirds who prefer fixed-rate mortgages. Of those who favored ARMs, 32% were ages 18 to 24, 33% had annual incomes of less than $25,000 and 26% had only high school degrees. By groups, 37% of Latinos and 31% of African Americans preferred ARMs, compared with 23% of whites.

The consumer group noted that with nearly a third of home buyers taking adjustable mortgages, some lenders are aggressively marketing them to lower-income consumers and those with low credit scores. “Given the high probability of interest rate increases, an adjustable-rate loan made to a family which can barely afford the initial monthly payments represents a ticking time bomb,” said executive director Stephen Brobeck.