Since the housing crash of 2008, adjustable rate mortgages have become a lot less common. Ask most financial advisors, and they will tell you that a fixed rate mortgage is always the safer bet. Yet, many banks still offer adjustable rate mortgages, leading some customers to wonder if they're really that bad after all. The truth is, it really depends. While a fixed rate mortgage is almost always the safer choice, there are some instances in which an adjustable rate mortgage, or ARM, is not terribly risky. There are other situations where signing up for one is a terrible choice. Here's a closer look at mortgage services:
When is an ARM a good idea?
To understand when an ARM works well, you first need to understand how this type of mortgage works. For the first few years, you will pay the loan at a low, introductory interest rate. Then, after that, the interest rate of the loan will adjust periodically based on terms outlined by your lender. Usually, it will change based on the current going interest rate.
An ARM works well when:
You know your income will go up in a few years. If you have a pretty low income right now but know, beyond a doubt, that it will increase before the interest rate of your loan goes up, an ARM can be a smart choice.
You plan on moving soon. If you plan on selling the home before that higher interest rate goes up, then an ARM can be a wise choice. Just make sure you're sure of your plans and ability to sell. This contributed to the housing crash of 2008. People bought on ARMS hoping to sell before the rate went up, and then nobody wanted to buy their houses.
When is an ARM a bad idea?
Your job is not stable. If you are in an industry notorious for being unstable, taking out an ARM is not wise since you would not want to lose your job around the time interest rates go up.
You think your life may change in the next few years. If you suspect you may get married, have kids, or make other changes that may require more of your income, you may not want to sign up for a loan in which you have no idea what the payments will be 10 years from now.
An ARM is not always a bad idea if you have an increasing income or plans to sell soon. But if you have any doubt in your financial or job stability, you're better off going with a standard fixed-rate mortgage.