Remember when your mom told you that if something sounds too good to be true, it probably is? The same could be said about mortgages with changing interest rates (or ARM in industry lingo). These people can be wolves in sheep's clothing, and if you're not careful, they'll puff and puff and take your house!
An Adjustable Rate Mortgage works like this. At first, your mortgage interest rate is likely to be anywhere from 2 to 3 percent less than the current market rate. This makes it possible for many people to buy a bigger house than they could normally afford. Most people think that by the time the loan adjusts, which could be in a year or as long as seven to ten years from now, they will be making more money, the economy will be better, etc.
The problem is that sometimes the future isn't as good as we hope it will be. People's lives change, the economy goes downhill, or we get new jobs. We went from having two incomes to having only one all of a sudden, or we just aren't making as much as we did a few years ago. Even worse, interest rates go up, and when it's time to adjust our ARM, it goes up a lot.
Some ARMs are based on the current interest rates set by the Federal Reserve and change every year. Sometimes this is a good thing because interest rates may have gone down, so you may end up paying less in interest than you did when you first got the loan. But, as is usually the case, the opposite is true: interest rates have gone up, so you have to pay more each month. The budget is getting a little bit tighter.
There are also ARMs that change after a certain amount of time, like 7 to 10 years. When they finally kick it, it can be a big surprise for the homeowner to see how much it costs. If they haven't saved money for this, it could be the difference between keeping their home and having to move. Depending on how low your interest rate was before the adjustment and how much it is now, your monthly mortgage payment could go up by twice as much.
So, what should most people who own their own homes do? Stick with traditional mortgages that have a fixed interest rate for the life of the loan. You can always look into refinancing your mortgage and getting a lower interest rate if the market changes in the future.
Adjustable-rate mortgages are good for people who like to gamble, and some people say they are also good for young families who know they will need a bigger house in the future and will also be making more money in the future. But as we all know, the only thing in life that is certain is change, and a smart homeowner knows when to play it safe and keep a roof over his or her head.
