3 reasons not to get an adjustable rate mortgage
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When you get a mortgage, you choose between two main types of loans: fixed rate or variable rate mortgages.
Each is exactly what it sounds like – a fixed rate mortgage has an interest rate that never changes during the repayment process, while an adjustable rate mortgage (ARM) has a rate that adjusts periodically during the repayment period. When the rate adjusts, it can change your interest charges and your monthly payments.
Variable rate mortgages inherently carry more risk than fixed rate mortgages, but under ordinary circumstances they make sense to some borrowers. Right now, however, an adjustable rate mortgage doesn’t make sense to virtually anyone.
Here are three big reasons.
1. Rates are currently at record levels
Mortgage rates have reach new records since March, and it is possible to get a 30-year fixed rate loan for well under 3.00%, and a 15-year fixed rate loan for well under 2.5%. These rates are much lower than anyone hoped to get last year, and home loans are now more affordable than ever before.
With fares this low, there isn’t much leeway to adjust downward. Therefore, betting on an adjustable rate mortgage is a bad bet – there is almost nowhere that rates can go up, if not go up.
2. The average interest rate of ARMs is higher than that of fixed rate loans
Speaking of record average mortgage rates, this mostly applies to fixed rate loans – not ARMS. In fact, the average interest rate on a 30 year fixed rate loan has always been lower than the average rate on adjustable loan options.
This is quite unusual, given the history of mortgage lending. ARMs typically have lower starting rates than fixed rate loans. In fact, the low initial introductory rate is usually what convinces borrowers to bet on these loans despite the uncertainty that comes with the possibility of a rate hike.
Borrowers may be willing to risk a rate hike in the future when they get a lower rate and more affordable monthly payments at the start of the loan – especially if they plan to refinance or don’t plan on staying at home for a long time. moment.
There is no reason to attempt a rate hike if you don’t get an initial period with a lower interest rate than the fixed rate alternative.
3. Economic uncertainty makes it difficult to predict future affordability
When applying for an adjustable rate mortgage, it’s important to make sure you can afford the payments if they adjust to the maximum potential limit. Otherwise, you are taking too much risk of losing your home due to foreclosure.
Sadly, COVID-19 has left most people’s economic futures uncertain. It is not clear exactly when the virus will be fully under control, when the threat of lockdown subsides and when the country will recover from the recession caused by the virus. It makes a bigger bet than normal to go for an ARM and higher risk rates than you can easily afford.
You don’t want to take this chance, especially when you don’t get any benefit from an ARM with a higher starting rate than the more secure fixed rate alternatives. Instead, just choose whether a 15, 20, or 30 year fixed rate loan is right for you and go for one of these more predictable loan options.