In This Uncertain Economy, Should You Take out an Adjustable-Rate Mortgage?

With inflation and shifts in the labor market, many people are struggling to make ends meet and worried about what the future holds. If you’re planning to buy a house, an adjustable-rate mortgage can give you low payments now, but it can be risky. Here’s what you need to know.

How Does an Adjustable-Rate Mortgage Work?

First of all, make sure you understand exactly what an adjustable-rate mortgage, or ARM, is. It’s a mortgage that has a fixed interest rate during an initial period, followed by a variable interest rate.

During an ARM’s fixed-rate period, your monthly mortgage payments will stay the same. The length of the initial period can be anywhere from three to 10 years.

The initial rate on an ARM is often significantly lower than the interest rate on a fixed-rate mortgage. That can make an ARM appealing to a homebuyer with a tight budget.

After the fixed-rate period ends, the interest rate on an ARM resets on a regular basis (typically every six or 12 months). The interest rate can go up or down based on a benchmark index. That means monthly loan payments can rise or fall.

If payments go up, they can go up a lot. Although there are limits on how much the interest rate can rise, a change can still come as a shock.

When Is an Adjustable-Rate Mortgage a Good Idea?

If you’re planning to buy a home where you will only live for a few years, an ARM might make sense for you. You’ll be able to sell the house before the interest rate resets and not have to worry about higher payments.

Taking out an adjustable-rate mortgage can also be a smart move if you expect your income to rise in the future. For example, if you’ll finish school and enter a field where you’ll have a high-paying job, you’ll be prepared to manage higher mortgage payments.

What about Refinancing?

Some people take out an adjustable-rate mortgage and plan to refinance before the interest rate resets. That’s a risky approach. It assumes that mortgage rates will go down in the future and that you’ll qualify for a lower rate.

Things might not work out that way. If you can’t refinance your adjustable-rate mortgage, you can get stuck with higher monthly payments.

Your mortgage might have a prepayment penalty, which can be significant. If you refinance, but you have to pay a penalty, you might not save much overall.

Should You Choose an Adjustable-Rate Mortgage?

An adjustable-rate mortgage is right for some people, but not others. An ARM can be a good choice for you if:

• You plan to live in the house for a short time and sell the property before the interest rate resets.

• You’re confident that your income will rise in the future.

• You’re comfortable with not knowing how much your future mortgage payments will be.

  
  

A fixed-rate mortgage can be a better choice if:

• You’re looking for a house to live in forever, or at least for the foreseeable future.

• The possibility of higher mortgage payments would stress you out and you prefer the predictability of fixed payments.

How to Navigate the Homebuying Process with Confidence

Buying a house can be complicated and confusing. There’s a lot of misinformation and one-size-fits-all advice out there.

Everybody’s situation is different. You need to understand how things work so you can figure out what makes sense for you.

The First-Time Homebuyer Masterclass will walk you through it all, clear up common misconceptions, and help you make decisions that are in your best interest. Enroll now.

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