Combine low start rates with more liberal qualification standards than fixed-rate financing and ARMs could often be the most attractive mortgage option for many borrowers. But ARMs have always been a compromise form of financing.
Borrowers get some benefits, and so do lenders.
The possibility that in the future rates might go up or down. And while rates going down is a joyous thing to behold, rates going up means higher monthly payments. Yes, sometimes rates rose, but they didn't rise enough to cause widespread foreclosures or bankruptcies. Lender qualification standards are based in part on interest rates. With ARMs, lenders typically qualify borrowers on the basis of the interest rate in the loan's second year, a rate that is often lower than today's costs for fixed-rate financing.