When Obtaining An Adjustable Rate Mortgage Is A Good Idea – Guest Post
Adjustable Rate Mortgages (ARMs) offer home buyers a way to purchase more home for less money. They offer a low introductory interest rate, then reset after a short period — anywhere from one to seven years — to a higher rate. Some ARMs can rise as much as six percentage points in interest over the course of a 30-year term.
ARMs got a bad rep after the housing collapse. Many financial experts blamed ARMs and other non-traditional mortgages for the economic meltdown, arguing that they enticed people to buy homes that they couldn’t afford then getting in over their heads when the rate readjusted.
However, some are taking a second look at ARMs, including them in strategic financial planning. While many financial advisors still consider ARMs to be a risky investment, some cautiously recommend them in a few scenarios:
You Don’t Plan to Stay in the House for Long
Fewer homeowners are living in their houses for 30 years. More and more people are buying property then moving after a few years — either as an investment strategy or because they are forced to move for a job or family change. If you know that you will only be living in your home for a few years, then an ARM might be a good idea for you.
The key is to be sure that you plan to move before your rate adjusts. Of course, you should also be sure that you can sell your home at cost or for a profit — or that you can handle the loss if you are unable to sell. While many expect the real estate market to continue to recover, there are no guarantees, and your house could depreciate even more in the coming years.
You Expect Your Income to Increase
This is always a tricky one. After all, how can you be sure that your income will increase in a few years? Maybe you are in school now (or your spouse is) to change careers or get a better-paying job. Maybe you have reason to expect to be promoted in a year or two. Maybe you know you’ll be coming into a trust fund.
Whatever the reason, you have a strong expectation that your income is going to increase. An ARM may be a good idea to let you take advantage of a good real-estate investment before you have access to that additional income. Again: It’s risky. Many would argue that you should wait until you have the additional income to purchase. But if your personal circumstances require that you purchase a home, and you expect your income to increase, then an ARM may be a good idea for you.
You Expect Your Credit to Improve
Many first-time buyers may consider an ARM because they don’t have the credit to be approved for lower rates on a 30-year fixed mortgage. Maybe you expect that to change because you have paid off all your delinquencies, or because you will have paid off other debts in a few years. If you expect that your credit will improve in the next few years, then you may consider getting an ARM then refinancing before the rates adjust.
Again, any speculation about the future is risky. In a few years, rates may be higher across the board, no matter how good your credit is. However, if you are prepared to face the consequences of that gamble, then getting an ARM may be a good idea (as it may actually pay off in your favor when your credit is better and rates are lower).
You Want to Invest
Sometimes, getting an ARM is a strategic investment move. If you have the opportunity to invest your money for a higher rate of return than what you would be spending on your ARM (or think you can expect to earn from the sale of your house), then that might be a better opportunity for you. Or you may find that the overall amount you pay on an ARM will save you more than a 30-year fixed mortgage in the long run — even if the loan resets to a higher rate.
As with all reasons that you might consider an ARM, this investing strategy can also be risky as you are counting on changes that may not necessarily come to fruition. Also, some states, such as New York, don’t offer them.
If you consider an ARM, you must consider how you will be able to handle the situation if your expectations don’t come your way. Remember that the market may change and your personal circumstances may change. If you can handle paying for the increased payment once the loan readjusts, then an ARM may be a good idea for you.
Audrey Porterman is the main researcher and writer for doctoralprograms.org. Her most recent accomplishment includes graduating from Ohio State, with a degree in business management. Her current focus for the site involves business PhD programs and counseling doctoral programs.