The logic behind traditional mortgages is simple, interest rates are low and as a homeowner you should lock in with a fixed interest rate, long term traditional mortgage loan. Interest rates for this type of mortgage are right around 6%. With interest rates this good why are so many homeowners opting for dangerous Adjustable Rate Mortgages? (Especially when this adjustable interest rate is going to rise sharply over the next few years.)
Most of these homeowners are blinded by the low introductory monthly payment. Not to mention you can qualify for a lot more house than you can with a traditional mortgage. The fact that when the introductory period ends the mortgage interest rate will be adjusted and the principal amount will be added in is a recipe for disaster for many homeowners.
Still, lured by savings as much as $500 per month on their monthly mortgage payments, homeowners have been signing up for these mortgages despite the risk.
Adjustable rate mortgages track a variety of market indexes for their interest rates. The lender will tack a percentage mark-up on top of this index whenever the interest rate is recalculated. When this happens the $300 in monthly savings you were enjoying could quickly become an additional $250 monthly liability. Interest rates are nearly impossible to forecast; however, the way interest rates have been going last year, they will surely continue to rise this year.
Supporters of Adjustable Rate Mortgages are quick to point out the average homeowner only stays in the same home for seven years. With that frequency of moves why pay extra for a 30 year mortgage? These are of course usually the people selling these loans.
Before you sign up for an adjustable rate mortgage loan consider the following. How long will you stay in your home? If you are 100% sure it will only be for a few years, get an adjustable interest rate mortgage. Make sure you operate your finances with a budget. Your monthly mortgage payment including interest, principal, insurance, and taxes should not be more than 35% of your income.
My name is Rob Regehr and I’m a personal finance writer with a chip on my shoulder for banks and brokers that take advantage of my friends and neighbors.
