When Does an Adjustable-Rate Mortgage Make Sense?

Some financial experts say an adjustable-rate mortgage, or ARM for short, is nothing more than a bait and switch: You take the loan at a low interest rate, only to discover the rate rising a few years down the line. And yet homeowners will find many of these offers when they’re looking to refinance. As it turns out, an ARM isn’t just something to benefit shady mortgage brokers. For some homeowners in certain situations, this kind of refi makes a lot of sense.

 

Look at Interest Rates

It can be tempting to consider an adjustable-rate mortgage, because the interest rates are usually lower than typical 15-year or 30-year fixed-rate loans. But ARM refinance loans will adjust the interest rates after 3, 5, or 7 years, depending on your terms. This is the gamble. If current interest rates are very high, you can take advantage of falling rates without dealing with the closing costs and paperwork of refinancing. In 2019, rates are relatively low, but it’s hard to predict the future.

 

How Long Will You Live There?

The most common time that an adjustable-rate mortgage makes sense is if you are not planning on living in the home for very long. Anytime you are purchasing a home that you plan to be your “forever home,” financial experts will strongly caution against adjustable rates. However, if the house is just a starter home for a few years, that’s a different situation. If you are considering a refi on a property you plan to sell before the rate adjusts, you could very well come out ahead.

 

When You Have a Strong Plan

If you are able to take the savings from your monthly mortgage refi payment and put it toward another investment, an ARM can make a lot of sense. You can use that money to pay off high-interest credit cards, student debt, or even medical bills. But if you’re still in the home for the first adjustment, be ready, as the rise in rates can be a shock. Be sure you fully understand what index your rate is connected with, along with all other terms. If you’re able to continue paying your mortgage even if the rate doubles, it could be worth the risk.

Go to Refi.com‘s home refinance page to learn more.

 

Sources:

 

https://www.bankrate.com/mortgages/arm-vs-fixed-rate/

 

https://www.thestreet.com/personal-finance/with-rising-interest-rates-do-adjustable-rate-mortgages-make-sense-14592163