When an ARM Might Be Right for You
August 6, 2009 by Miranda Marquit
Filed under Finance
Ever since the mortgage crisis, we’ve heard a lot about how terrible adjustable-rate mortgages (ARMs) are. And, truly, they can spell a great deal of trouble for those who use them unwisely. But, are ARMs really the root of all mortgage-related evil? With the interest rates on ARMs back below the rates offered on fixed-rate mortgages, some are taking a tentative look at ARMs, and considering the savings they can enjoy with a much lower mortgage interest rate. But be careful! In one, five or seven years, the rate re-sets, and you could find yourself with an unaffordable mortgage payment.
Who might benefit from an ARM
There are those who can benefit from an ARM. These folks include:
- Those who know they will move before the re-set in five or seven years.
- Those who want to refinance to a lower rate from their fixed-rate mortgage — and who plan to move before the re-set.
- Those who can afford the likely mortgage payment on the higher rate, but who want the interest rate savings.
- Those with a large down payment, and with a plan to aggressively pay down the principle, so that they will qualify to refinance to a fixed rate before the mortgage re-sets.
As you can see, there are a lot of “ifs” to getting an ARM. While the interest savings can be rather significant over the initial period of the loan, it is important to consider the risks and your personal finance situation. You should not get an ARM if the only way you can afford the mortgage is if you have the lower monthly payment offered to you by the initial rate. Additionally, if you can barely afford the payments now, don’t rely on the prospect of a raise in the future to “save” you when the mortgage re-sets. And realize that even the best-laid plans to move or refinance can go awry (as thousands found it in the last two years).
Would you consider getting an ARM?
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If you got an ARM 5 years ago, you are probably getting a rate reduction right now. Folks who were in the mid-4% range are now in the 3’s. But I would still be careful.
Makes the most sense when interest rates are high and likely to fall….. hint, hint, not the current environment. Now is the time to lock in a fixed rate mortgage before the Fed starts raising rates to protect the dollar.
You make a great point, RateNerd! The real trouble came with resets that came before the financial crisis, and which coincided with the drop in real estate values. But your urging of caution is important; as the economy recovers, rates will increase again.