Are Adjustable Rate Mortgages A Good Idea

Performance Property Real Estate Question

Q: Do you think adjustable rate mortgages are a good idea? Sandy, Little Ferry, NJ

A: An adjustable-rate mortgage (ARM) is a home loan with a variable interest rate that can fluctuate periodically based on the performance of a specific benchmark. Although ARMs generally have caps that limit how much the interest rate and/or monthly payments can rise per year or over the lifetime of the loan, I think they are way too risky for most home buyers particularly first time homebuyers. An ARM may make sense for some investors, but I have seen investors get burned by adjustable rate mortgages particularly by option ARM loans that were popular before the last financial crisis. Even a 30-year fixed rate mortgage does not necessarily have a fixed monthly payment because although the principal and interest are fixed, the property taxes and insurance are not fixed. Although adjustable rate mortgages give home buyers more purchasing power, the risk far outweighs the benefit in my opinion. The poet, Robert Frost said that “a bank is a place where they lend you an umbrella in fair weather and ask for it back when it begins to rain.” You can never be sure what your financial situation will be at any point in the future or how readily available mortgage credit may be at that time for you to be able to refinance. Thanks for your question, Sandy.
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