15 years ago, adjustable rate mortgages were all the rage. Both loan officers and real estate agents would convince naive home buyers that ARM loans were not only affordable but their only option if they wanted to own a home.
Their reasoning was that home values would increase, the home would build equity and new homeowners would then be able to refinance their loans before the rate would adjust in 5 years.
But home values didn’t increase and thus homeowners were left with an underwater mortgage they were not able to refinance. When their payments went up, they couldn’t afford the loans they agreed to pay and countless homes went into foreclosure.
You might think an adjustable rate mortgage is a horrible idea for a new homeowner. But that’s not always the case. There are certain unique situations where ARM’s are not such a bad idea after all.
Here are 3 circumstances in which an adjustable rate mortgage isn’t such a bad idea:
You’re Selling The House For Profit
If you’re purchasing a property for the sole purpose of flipping it for a profit, getting an adjustable rate mortgage may not be such a bad idea after all. You end up getting a lower mortgage payment due to the lower interest rate.
The downside is that you will need to sell the house before the 5 years are up, regardless of the current market, otherwise you’ll be hit with a higher monthly payment.
You’re Paying The House Off Before Your Rate Adjusts
If you plan to pay the entire balance of the loan off before your rate adjusts, an adjustable rate loan may not be a bad idea.
This way, you’ll take advantage of a lower payment while you gather up the money necessary to pay off the entire loan.
This could be useful for those who are expecting to get a lump sum payment within a few years. This could be a trust fund, a settlement from a lawsuit or a pension.
If The Current Interest Rate Is High
If you’re young, willing to take a risk and plan to stay in the home for a long time, you could get an ARM if interest rates are high.
If home prices are going up and interest rates are high (rare combination), then when your 3 or 5 year period is up, you’ll need to refinance your loan.
There are two risks with this method, the home must have equity so you’re able to refinance and interest rates should be lower than when you first bought the house.
Talk to a broker or agent you trust, as they will be able to give you personalized pros and cons of taking on this risky kind of loan, including any possible worst-case scenarios.
While owning a home is part of the American dream, it’s better to wait until you can give a 20% down payment and afford the monthly payments of a fixed rate mortgage.