Adjustable-rate mortgages, or ARMs, are often attractive to home buyers and mortgage borrowers for a variety of reasons. The rates are typically considerably lower than fixed mortgages. With a lower monthly payment, borrowers can shop for a more expensive home or reduce their monthly budget.
ARMs Are Risky, Especially When Increases Are Likely
Interest rates have been historically low for several years. Economists and financial advisors believe that rates will soon start creeping up. Does that mean that borrowers should avoid ARMs at all costs?
In a nutshell, no, but anyone considering an ARM should think much further beyond the next few years and plan for increased payments. Understand that the rate will likely go up, and take steps for how you will handle the increase.
Your Finances Can Go On An Unpleasant Ride
Cluelessly hoping for a stable rate is not a good plan. While your ARM might be .5 to .75 percentage points less than a fixed rate, the adjustment can be a percentage point or more above that fixed rate. When rates are poised to increase, an exit plan within the next few years is a good idea.
Some people are financially secure enough to shoulder the risk of increased payments. If your debt ratios and monthly budget are taxed at the adjustable rate payment, you might want to pay a little extra to secure a fixed rate.
ARMs Good With A Short-Term Plan
Not everyone buys a house to live in for many years. Some know that the purchase will be temporary. In such cases, maximizing your budget by opting for the lower ARM payment makes sense. Why pay a higher interest rate if you are certain that you’ll be selling the house before the ARM adjusts?
As many homeowners know, plans change, and no one can predict exactly what interest rates will be in the future. The key tip is to only borrow with an adjustable rate when you are prepared for the worst.