Adjustable rate mortgages (ARMs) can be an attractive loan option for individuals who fall into these four categories:
1. Short-Timers: They only plan to own their home for a short period of time, so locking in a 30-year loan with a higher rate doesn’t make sense
2. Hedgers: They believe interest rates will be declining or staying flat in the years to come and possibly plan to refinance.
3. Planners: They have a realistic strategy to aggressively pay down the home loan within the ARM period.
4. Savers: They have the cash on hand to pay off the loan if interest rates rise.
Overall, ARMs are not a good fit for everyone. We clearly witnessed this during the housing boom as many families went into foreclosure because they could no longer afford to make payments on their homes. My recommendation: Do the math for each loan option available and don’t get starry eyed about the low ARM interest rates. Review the figures with your financial planner to ensure the loan is reasonable in your financial plan and that you can afford the home in all possible loan scenarios.