The dream of homeownership is just that for many Americans — a dream — as stubborn inflation continues to keep interest rates high, making it increasingly difficult to afford a mortgage.
Because of how hard it is out there for prospective homeowners, money expert Clark Howard says he has shifted his viewpoint somewhat when it comes to adjustable-rate mortgages (ARMs).
With ARMs, you typically get a fixed interest rate for a certain time — typically anywhere from three to five or seven years — but then interest rates fluctuate annually for the remaining term of the loan.
Why Clark Likes Adjustable-Rate Mortgages Right Now
Clark is usually not a fan of ARMs because of the risk of getting locked into a high-interest rate, which could hasten a mortgage default, then foreclosure.
But Clark has warmed to the idea of taking out an ARM in today’s housing market. Not only do many financial experts forecast interest rates to fall at some point in the near future, but so does Clark.
“Mortgage rates should settle lower than they are now,” he says on his podcast. I’m putting this guess in the complete danger category. But I think we could see rates back in the 5s again. Very unlikely back in the 4s. Could be 15-year loans go back into the 4s.”
Under falling interest-rate conditions, buying an ARM could make financial sense for a lot of people looking to buy a home.
“The thinking right now is that interest rates are higher than they will be if we look a few years down the road on mortgages,” he says, “and so even though taking out a five-year ARM is risky when you’re buying a home, you will normally get a meaningfully lower rate than you would if you go into a traditional 30-year fixed mortgage.”
Given that an ARM is not for everybody, you may be wondering when does it make sense to consider getting one.
When Should You Consider an ARM?
You should consider an ARM when you have reason to believe that interest rates are going to drop at least for a certain period. According to Freddie Mac, here’s when getting an ARM makes the most sense:
- Interest rates are high at the time of the home purchase.
- You know that you will be in a home temporarily and will sell or move before the adjustment period of the loan.
If interest rates are low, that’s when you take advantage of a 30-year fixed mortgage. If you think interest rates may be lower in the years ahead, Clark is OK with you considering a five-year ARM.
“Really the interest rate break benefit is at five years,” Clark says, “and it is a calculated risk that you’re not going to be stuck in a really burdensome loan if you can’t refi it in that 5-year window.”
In conclusion, should you get an ARM? Clark says with market conditions being what they are, your wallet could benefit.
“Again, this is something that people are doing that I’m open-minded on as an alternative to paying today’s high rates on a 30-year fixed,” he says.
Want to learn more? Read up on how and why to refinance your mortgage.