Are Adjustable Rate Mortgages a Wise Choice?
With interest rates rising, are adjustable rate mortgages a wise choice for you?
What is the best mortgage for you? All of us have been spoiled with the rates being so low for the last 3 years. However, over the last 45 days, the 30 year fixed rates have already gone up about 1%. Will they continue to rise? Perhaps. How high? No one knows. What is the wise choice right now?
Actually since everyone's circumstances are different the answer needs to be customized. There are a few basic principals that should govern your decision, regardless of what is happening with the rates.
Here are a few factors to take into consideration:
1.How long do you plan on keeping your home? For example if you know you will keep your home no more than 5 years, then you have an easy decision. Why take out a 30-year fixed rate? A 30-year fixed rate with this example would be wasting good money. In this case, I would probably recommend a 5/1 arm or perhaps a 7/1 arm if the homeowner is very conservative. With the 7/1 arm the homeowner has 2 years of cushion.
2.How important is cash flow to you? Let's say, you know that in the next 1-3 years you will be earning substantially more money. An adjustable rate mortgage perhaps is perfect for you or even an interest only mortgage may be even better. Another example may be a pregnancy or choosing not to return to work until the kids are old enough to go to school. You are willing to take on some risk, however you know that even if the rates rise on your "arm", you will be earning more in the near future, so you are willing to accept that.
3.Can you sleep at night if you choose an adjustable rate? Here is a quick test you can take: Do you invest in the stock market? If yes, you can probably tolerate some risk. Individual stock can be crushed in one trading session. The good news about adjustable rate mortgages, is that they are generally fixed for a period of time. A 3/1 arm for example, means that the rate is guaranteed for the first 3 years. So if the rates continue to climb for lets say 2 years, but then in the 3rd year they begin to come back down to where they were when you took out your loan, then you have not been affected at all. If you think however you will be calling your lender every day or checking the newspaper every day to see where the rates are now, maybe adjustable mortgages are not for you. Saving some money is not worth adding extra stress to your life. Life has enough stress as it is.
So what's the best choice for you? You must answer that question. Don't automatically dismiss an adjustable rate mortgage because you have always had fixed rates in the past. I suggest you review the above questions and work with a knowledgeable, experienced mortgage professional. Also, I would suggest avoiding loans that have a pre-payment penalty. It may restrict your choices in the near future.
Of course, I'll be very happy to assist you with your decision as well. You can e-mail me at