What Is a Flex Mortgage Loan?

by Duncan Jenkins ; Updated July 27, 2017

Flex mortgage is a different way of saying variable mortgages or adjustable rate mortgages (ARM). These programs all offer customers more options--and risk--than traditional 30-year, fixed-interest mortgages. While there are wide differences in programs and lenders, there are some qualities that all of these products share.

History

Flex mortgages, or ARM loans, have been in existence in the commercial and high-finance markets for a long time. Recently, however, in an attempt to raise home ownership by the government and to raise profits by the banks, these loans became available to individual borrowers.

Function

These loans work differently, but within the following structure: when the loan is first financed, the interest rate paid by the borrower is low (often called a "teaser rate") but may fluctuate based on a benchmark rate (like Prime or the LIBOR); the low rate may or may not adjust for a period of years or months, but after a predetermined time, the rate will often adjust much higher--thereby increasing the payments--and may continue to fluctuate.

Benefits

The main benefit of these loans is that lower payments allow customers to purchase homes with small down payments and to potentially build equity. Once the low rate has expired, most customers refinance their mortgages to get low, fixed rates that they were not qualified for when they purchased the home.

Warning

Flex loans can be dangerous. If a customer truly cannot afford a property and takes out an ARM loan with the expectation that the low payment will never change, problems are imminent. Many, many customers can end up struggling to make large payments and, in the worst of cases, may be surprised to see their rate and payment change after an adjustment because a loan officer didn't properly explain the program.

Theories/Speculation

According to "New York Times" columnist and Nobel Prize winning economist Paul Krugman, these flex loans are in fact "sub-prime" and are ultimately worked out in the lender's favor, not the borrower. Many ARM loans come with higher-than-average fees and rates, thus forcing the customer to pay more for a loan that he perhaps could have avoided. In fact, many economists argue, the credit crisis of 2008 largely was a result of bad loans defaulting.

About the Author

Based in Eugene, Ore., Duncan Jenkins has been writing finance-related articles since 2008. His specialties include personal finance advice, mortgage/equity loans and credit management. Jenkins obtained his bachelor's degree in English from Clark University.