Why adjustable rate mortgage is bad for some

Adjustable Mortgage Rates (ARMs) offers the lowest mortgage interest rate for a period of time allowing many who may find it difficult to get a mortgage to get into a home. Monthly payments for the initial period of time may be 15 percent lower compared to a traditional home purchase loan. However, the ARMs are not for everyone.

ARMs are not for people who intend to live in a home for more than five years. The biggest drawback is the interest rate risk. After initial five year period, ARM rate will be adjusted every six months or twelve months. At a time home mortgage rates are at a historic low, it doesn’t make financial sense to get into an ARM.

Interest rates are kept artificially low due to the Feds bond and mortgage buying program. It is anticipated to go up soon and if you are on a fixed income, additional interest will require larger mortgage payment making it difficult for you to balance your monthly budget. Unless you have savings new mortgage payments will create financial burden on you.

The ARM after the initial lower interest rate could wipe out savings you made within couple of years making it more desirable to go with a conventional loan.