Why your adjustable-rate mortgage might become a huge problem

|
Adjustable rate mortgages
Image Credit: Dreamstime
Team Clark is adamant that we will never write content influenced by or paid for by an advertiser. To support our work, we do make money from some links to companies and deals on our site. Learn more about our guarantee here.
Advertisement

If you have a variable-rate mortgage, money expert Clark Howard says now may be the time to refinance into a fixed-rate loan.

An adjustable-rate mortgage (ARM) has a fixed interest rate for a period of time — usually three, five, seven or 10 years — but then interest rates adjust annually for the remaining term of the loan.

On the other hand, when you have a fixed-rate mortgage, your monthly payment stays the same no matter what.

Read more: Is a biweekly mortgage plan a good idea?

Adjustable-rate mortgages: What Clark wants you to know

So why would anyone choose an ARM? First of all, some homeowners don’t worry about the floating interest rate because they intend to move before the introductory fixed-rate period is up.

Another reason people think ARMs are a good choice is because the initial interest rate is lower than a fixed-rate mortgage. But will they be able to afford the payment when the rate adjusts? That’s the issue.

Finally, people get ARMs if they think interest rates could fall in the future, though that isn’t likely at this point.

Bankrate.com chief financial analyst Greg McBride told Clark.com that as of August 2017 fixed-rate mortgages are within half a percentage point of record lows.

Rates change daily, but 4% for a 30-year fixed and 3.25% for a 15-year fixed is pretty common. That’s a real deal!

McBride says we’re currently in an environment where the wind is blowing toward higher interest rates, which could cause big problems if you have an ARM.

Simply put, your monthly payment is likely to go up when the interest rate adjusts.

“In a rising rate environment, those adjustable-rate mortgages become a significant exposure. When your loan adjusts, you’re subjected to a whopper of an increase,” McBride said.

Why take the risk? The adjustable rate is really a dangerous game to be in, Clark said on the radio show.

“Every factor out there is tending to support a move to a fixed rate and that’s where I think you should head on your mortgage,” Clark told his listeners. “If you’re in an adjustable rate, take advantage of these low rates that exist today and get into a 15 or 30-year fixed.”

Listen to Clark talk about adjustable-rate mortgages on The Clark Howard Show Podcast

Read more: How I paid off my $86,000 mortgage in 2 years

5 basic money rules you can live by forever

Advertisement
Mike Timmermann About the author:
Michael Timmermann paid off his mortgage in two years. Now, he shares his money-saving tips on his blog, Save on Almost Everything.
View More Articles
  • Show Comments Hide Comments