Is a loan broker suggesting that you refinance your mortgage and jump into an adjustable rate mortgage?
Before doing so you have to ask yourself just one question: do you feel lucky? Well, do you? Take a look at this graph. It says it all:
This shows where adjustable rates are relative to where they have been (and, according to some, where they’re going).
In short, back in 1984 adjustable rate mortgages were sailing along at 10-12%. If rates climb that high again, your mortgage payment could double (at least). Will you be able to afford your payments if that happens? That’s a question you must ask yourself if you are considering an adjustable rate mortgage – assuming you plan on living in your home for any length of time. While interest rates might stay low for a while, don’t bet your financial future on it. Always be prepared for a “worst-case” scenario. That’s exactly what people didn’t do a few years ago, and as a result, they lost just about everything they had. Don’t let it happen to you.
While people who currently have ARMs have done really well over the last several years, every party ends sooner or later. The low interest rate environment we’re in may be coming to an end.
When should you have an adjustable rate mortgage?
When you get an adjustable rate loan, it’s usually fixed for some period of time. Often that period is five years. If you know you will sell your home in five years, it might make sense to take an adjustable rate mortgage now to take advantage of the current low rates. But most people find it difficult to really know how long they are going to stay in their home. If you don’t know how long you are going to stay, don’t fall for an ARM.
You might ask if you should take the ARM if it’s the only way you can qualify for a mortgage or afford the payments. My answer here is a resounding “no.” If you have to take undue risk in order to buy the house, find another house that you can afford or consider moving to a more affordable area.
I might be old-fashioned, but I’ve seen too many families hurt as a result of bad real estate decisions. If I held an adjustable rate mortgage, I’d do whatever I could to get a fixed rate mortgage now. How do you stand on this?
Kendall says
Do these typical have a prepayment penalty? If I went with an ARM, it would be with the idea that I would pay it off before the rate readjusted.
Neal Frankle says
That’s a good item to confirm prior to signing up for the loan.