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Should you Consider an Adjustable Rate Mortgage (ARM)?

6/1/2016

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No.  Most financial advisers do not suggest using ARMs so don't even consider it.  

To help better explain why they're bad ideas, I will debunk some reasons people use them.

I'm Only Going to Live in the Home for a Short Period of Time

The thing about interest only ARMs is that you can pay only the interest for a short period of time.  Then your payment balloons making the payments double or even triple to start paying down the principal of the loan.  So, if you are only going to be in the house for a few years, the monthly payment would be smaller. 

Here's the flaw in the logic.  It costs money to sell a home.  This money usually comes from what equity you have built up in the house.  If you have only been paying interest, you will have no equity unless the house has gone up in value.  On a similar note, if the market goes down, you could end up being upside down on your mortgage (you owe more than the house is worth) and you would still owe the same amount on the house from the day you bought it.

In short, you probably shouldn't buy a home to live in short term or you shouldn't buy a home without the ability to wait for a market to recover.  In general, that means you either live in the home or rent out the home for a longer period of time.  Either way, you would not want to be on an interest only ARM where you will have to start paying principal and the interest rates could double.  

An ARM is the Only Way I Can Afford A House

If an ARM is the only way you can afford a house, I could see why it would be tempting.  You can always refinance the house at a different time.  However, refinancing costs money.  That money can come from the equity of your house so you may or may not have enough depending on whether the house has gone up in value.  

In this circumstance, it would be better to rent for another year and work on your income, down payment, and credit score.  You can speak to a mortgage adviser about what strategies would get you most ready to buy within your set timeline.  It's better to buy on a plan you will be able to afford long term. 
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