The adjustable rate mortgage got a questionable reputation during the Great Recession because of its role in the housing crash -- too many people were buying homes using these mortgages when they couldn't afford the higher rates after the initial period -- but this type of mortgage is, itself, not a bad thing. In fact, there are times when an adjustable rate mortgage, or ARM, is a smart choice. If you find yourself in one of these situations, grab an ARM with a good initial rate and long initial rate period for some savvy home buying.
You Can Offer a Huge Down Payment
The issue with the ARMs in the early part of this century was that once the initial rate period ended, the interest rates skyrocketed. Home prices were high, so mortgages were high, with many not requiring a down payment. Because many of the people holding these loans were people who did not make enough money to cover the added interest or were fired from their jobs at the beginning of the recession, the mortgages went into default.
However, if you can afford a huge down payment, an amount that would make the rest of the mortgage affordable even with high interest rates, the ARM could work for you. Put the down payment in, so your mortgage amount is low, and then take advantage of the low initial rate period to pay down even more. Even if your interest rate then rises, your payments won't go up much.
You Can Make Big Payments Early On
The appeal of an ARM is that initial payments are low. If you have enough income to make really big payments during that initial term, you can drop the remaining mortgage amount to a point where, if the rate goes up later on, the payments are still affordable. In the end, the effect can be similar to making a big down payment.
You Plan to Sell Before the End of the Initial Rate Period
These ARM mortgages have an initial rate period that usually spans a few years. If you think you might be selling the house before that rate period ends (for example, you're planning to flip the house in a few years), then an ARM makes sense. You get low interest rates and then move on. Of course, the drawback here is that you have to be confident the housing market will allow you to sell the house for more than the amount of the remaining mortgage.
Talk to mortgage loan officers like those at TNRD Home Loans about your situation and plans. They'll show you the types of ARMs you could get and how those might play out in your exact situation.