Is an Adjustable Rate Mortgage really as bad as I have been led to believe?

If you can pay off your loan in 5 years it’s a smoking deal – otherwise unless you refinance into a 30-year fixed later you’d get screwed over.

If the 3.5% rate is what you need to make the purchase go for it, otherwise a 30 year fixed mortgages are at 50 year lows you would be boarder line insane not to get one. The 3.5% may be tempting but you will be kicking yourself in 5 years when the rates are 8–10% with an arm you you get today. All my opinion!

Get the fixed rate mortgage, don’t think twice about it, it is a steal! There are many types of adjustable rates, the rate is tied to different things. Don’t get an ARM

Yeah I guess you’re all right. ARMs are a terrible idea in a low-interest market, huh? The fixed rates will never be lower, they can only go up from here.

If you can afford the payment on a 15 year mortgage fixed rate (the rate should be lower than the 30 year) do that.

I checked out LendingTree.com on a 15-year fixed rate FHA loan. The basic terms right now are 3.5% down payment and 4.25% interest rate over the life. The rate goes up a bit for 30-year fixed.

Is FHA the way to go? I can apply for it because I will be the owner-occupant and I meet the other criteria I know.

Definitely avoid the ARM unless you know for an absolute certainty that you can pay it off at the five-year mark. Also, make sure your mortgage does not have a pre-payment penalty. That way, if your financial outlook improves you won’t be “punished” by paying it off early.

Thanks everybody for the advice. I just posted another related question here.

You most definitely don’t want an ARM unless you work for a company that requires you move every 2–3 years, and will purchase your house from you if you cannot sell it within 60 days.

Depends on the terms and your situation. Talk to a financial consultant not us.

Also situations change. That starter home you knew you’d be out of in 5 years might become your home for longer than that. Maybe your husband loses his job in a field without many opportunities. It’s best to not assume your finances will be good always.

If you talk to an “experet” as @SeventhSense make sure you are NOT considering a mortgage broker an expert; they will give you mortgage options, but you should not be following any particular recommendations by them. They are sales people, the make more if you borrow more. And, I have to disagree a little, because financial consultants many times believe what they are selling, and people still wind up getting hurt, and we are not talking about your entire financial portfolio at this moment.

I think make sure you understand the mortgage you are getting, you want to focus on the terms, and also if there is a prepayment penalty, which has come back into fashion with some of the interest only loans. If you have a lawyer looking over your home purchase ask him to review your mortgage too, to be sure it has everything you expect and no surprises. Real Estate lawyers see these documents over and over again. Don’t get greedy, because you can wind up with nothing at the end. Just buy what you can afford with the simplest of loans. Nothing tricky, nothing to try and beat the system. This is your home.

I think @hug_of_war hit the nail on the head It’s best to not assume your finances will be good always. Even if you only plan on being in the house for a few years, I know many people right now who have been trying to sell their house for over a year, if your ARM ends during that time, you will be stuck.

A 5-year ARM rate right now is at 2.5%. @Cruiser with the way the economy is right now, do you really think we are going to be better off in 5 years when the rate converts to a 25-yr fixed? You say 8%-10% fixed rate. Now I know you posted this almost 2 years ago, but I don’t see things changing for quite a whilte. @JLeslie, @PandoraBoxx, and @Darwin – still not believers in the ARM? Worst case scenario… the economy does pick up… why not just refinance to maybe a 5.0% 20 or 25 year fixed then?

@xBRIANx Are you arguing for the ARM? Fixed rates a so cheap, I don’t know why anyone would get an ARM right now.refinancing costs money and time, and your house will need to appraise, if it doesn’t you can’t refinance. Why take the risk when borrowing money at a locked in rate is so good right now.

@JLeslie For the last 5 years I’ve heard that “Fixed rates a so cheap” and will never be any lower than they are now.

Take a look at this line graph. In 2006, economists and brokers were saying we are at an ALL TIME LOW at 6.0% for a 30 year fixed. Then in 2007, again ALL TIME LOW at 5.5% for a 30 year fixed. 2008… same story: ALL TIME LOW at 5.0% for a 30 year fixed. 2009: 4.75% for a 30 year fixed. 2010: 4.5% for a 30 year fixed. Now… will then downward slope continue? Probably not. But I think it will level off for at least 5 years and then maybe start creeping up.

I’m betting on an 3.0% 5-year ARM right now. I can refinance to a 20 or 25 year fixed at around 4.5% in the year 2016 (assuming that I’m right and that mortgage rates won’t rise in 5 years).

@xBRIANx Of course I agree with you that people, media, are aways saying “all time low,” or “so cheap,” or “rates are going up lock in now,” blah blah blah. :) But, that does not address if a person wants to refinance and the house does not appraise. I tend to be very very risk averserve, so it is in my personality to go fixed. My CD have done much better over time then my funds. I know it doesn’t beat inflation, but over the long term I am happy I did a lot in very conservative avenues. I wish I had locked in more CD’s for longer terms at 4.5%, all my CD’s have come to term now. I always keep in my mind that at 5% money doubles in just less than 15 years.