When an ARM is a Good Idea?
A: Taking out a short term ARM mortgage product can be a great option if you know for sure that interest rates are going lower and/or you will be selling/refinancing before the ARM expires.
NOTE: You should NEVER take out a short term ARM product to rationalize buying a property in order to get your monthly payments into the range of your own affordability. If you are thinking about doing this you should realize that you are buying a property you CANNOT AFFORD, and taking out a ARM loan to make the payments lower. Its a short term fix that leads to a longer term problem!
Check out The Money Store's ARM vs FIXED RATE Calculator and see what the difference will be between these two mortgage products! If you intend to live in your new home for the next 7-10 years, it would be wise to go with the 30 YR Fixed loan product and buy a property that fits in with your financial budget.
Something to keep in mind: An ARM product is a good idea if you know that interest rates are declining and will be lower when the ARM expires. Right now, we have 1-2 rate hikes ahead of us and then a pause. How long the pause will last is too early to tell right now. In addition, the bond markets did experience a brief inverted yield curve recently which historically speaking is an indicator of a looming recession. Should this actually occur down the road (say 1-2 years from now), the Fed will be forced to LOWER RATES to help stimulate the economy. A short term ARM would be a good option in this scenario as interest rates will most likely be lower when the ARM expires putting you in a better position to refinance!
Comments (2)
If you are going to stay in the property for 7-10 years, you should go with a fixed-period ARM. There is no point in going with a 30-year fixed unless (a) rates are at an all-time-low or (b) you know you will stay in the property for 30 years.
In my eyes, a 30-year fixed is a loan of the past. A better option would be a 5, 7, or 10-year ARM in which the rates are locked for that initial period, this way you get the stability and security of a fixed rate loan but also the benefit of a lower rate.
Who stays in a property for 30 years these days? No one. Let's say that you do decide to stay in the property for more than 10 years (assuming you've selected the 10-yr fixed period ARM), but years 8 or 9 you would re-assess your situation and decide whether you should re-invest a small portion of all of the money you've saved by not going with a 30-year fixed and refinance for another fixed period ARM. The only time you would want a 30-year fixed is if rates are at an 'all-time-low' and currently we are not at that low.
The only time you would ever select an ARM (rate adjust annually) is if you are flipping or know that you will sell in the near future.
Thank you for your blog.. fantastic information!
Posted by James Chanth | February 1, 2007 8:09 PM
Hey dear I mean, they say they'll pay part of your mortgage if you agree to give them a percentage of the money you'll get by selling the house later on. But what if you decide to never sell the house?
Posted by fivefingers kso | August 12, 2010 3:01 AM