Opting for ARMs in High-Rate Times
Author: Jason Buzi / Date: August 8, 2023 / Tags: mortgage
(MoneyHippo.com) – An adjustable-rate mortgage is a type of home loan where the interest rate changes over time, usually based on a specific benchmark or index. These mortgages typically start with a lower rate for an initial period (e.g., 5 years) and then adjust periodically (e.g., annually) based on market conditions.
When mortgage rates are high, getting an ARM could be a reasonable strategy if you believe that rates will drop in the future, or if you only plan to stay in the home for a short period. Here are some factors to consider:
- Your time horizon: If you plan to live in the home for only a few years, an ARM with a lower initial rate might make sense, as you may sell the home before the rate adjusts higher. However, if you plan to stay long-term, you risk facing higher payments if rates increase over time.
- Your risk tolerance: An ARM can be riskier than a fixed-rate mortgage, as your payment can increase significantly if rates rise. If you are comfortable with this uncertainty and can handle potential payment fluctuations, an ARM may be an option to consider.
- Your expectations for interest rates: If you believe interest rates will decrease in the future, an ARM could be more favorable, as your mortgage rate will adjust downward. However, this is difficult to predict and depends on various economic factors.
- Refinancing options: If you choose an ARM and interest rates drop, you may be able to refinance to a fixed-rate mortgage with a lower rate. Keep in mind, though, that refinancing can involve additional costs, and there is no guarantee you’ll be able to secure a lower rate in the future.
Ultimately, the decision to get an adjustable-rate mortgage when mortgage rates are high depends on your individual circumstances and financial goals. It’s important to carefully weigh the risks and benefits, and consider consulting with a financial professional to help you make an informed decision.
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