Too good to be true? It probably is. The Adjustable Rate Mortgages (or ARM in industry lingo). These guys can be a wolf dressed in sheep’s clothing and if you aren’t careful they are going to take your home away from you!
An Adjustable Rate Mortgage works this way. Initially, you are probably going to be paying anywhere from 2 – 3 % below the current market interest rates on your mortage. For most people, this allows them to purchase a bigger house, one that would normally be outside their price range. The normal reasoning is that by the time the loan adjusts they will be earning more, the economy will be better, etc.- which could be a year from now, or as much as 7 – 10 years from now –
Sometimes it just isn’t that way. In no time, we went from two incomes to one or we just aren’t making as much as we were. Worse still, interest rates rise and when it comes time for our ARM to adjust it goes up.
Some Adjustable Rate Mortgages changes every year based off current interest rates set by the Federal Reserve. Sometimes, this can be a good as interest rates may have fallen and you could end up paying in interest than you were at the start of your loan.
There are other ARM’s that adjust after a number of years – say 7 to 10. When they finally commit themselves, it can be a real sticker shock for the homeowner. If they haven’t planned for this financially it could mean the difference between them keeping or losing their home because monthly mortgage payments could double in size depending on how low your interest rate was before the adjustment and what current interest rates are.
So what’s the best decision that most smart home owners make? Go with conventional mortgages that have a predefined interest rate that is locked in over the life of the loan. If market conditions allow, you can always look into refinancing your mortgage and getting a lower interest rate.
Adjustable rate mortgages are good for those who like to take risks – and some argue they are good for families just starting out who know they will need a bigger house in the future and will have larger incomes in the future as well. However, as we all know, nothing is as certain in life as change and sometimes the smart homeowner knows when to play it safe and keep a roof over his or her head!