Why An Adjustable Rate Mortgage Is Bad
from daveramsey.com on 26 May 2011
The adjustable rate mortgage (ARM) is a lot like a dinner that makes you sick to your stomach.
You don't know when or where it's going to move, but you're pretty sure you're not going to like it.
The ARM is a mortgage loan type where the rate is a little lower than a conventional mortgage, but that's just to bait you into it. Once a certain amount of time passes, the rate changes based on the market. Since rates are pretty low right now, where do you think they will adjust from here?
In a word ... UP!
With mortgage rates being as down as they are, the last thing you want is one that's going to shift. Don't be suckered in by a bank that offers you points or a lower APR that will eventually change. The very purpose of a mortgage with an adjustable percentage is to favor the bank. They want to get as much money out of you as they can.
Since your home is usually your largest asset, what you want most for it is stability. The bigger the asset, the more it affects you when there is uncertainty. If you have debt on your house and on your stereo and both rates get jacked up, which is going to cause a bigger ripple in your pond?
The most stable situation is a paid-for house. The next best thing is a mortgage where the payment is no more than a fourth of your take-home pay on a 15-year fixed rate loan. Your payment will stay the same month after month, it's easy to budget for, and you won't get hit out of nowhere with an increase that could blow up your spending plan.
If you have an adjustable rate mortgage, now is the time to refinance to a fixed rate. Take advantage of the low rates. Not only will you lock in a good percentage, but you'll know your payment each month, which gives you a little stability in an unstable world.
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