Ask the Egghead: Is an adjustable-rate mortgage a good idea?

Dear Egghead: I’m ready to buy a house, and the lender I’m working with recommended an adjustable-rate mortgage instead of a fixed-rate mortgage because my payments would be lower. Are adjustable-rate mortgages a good idea?

ANSWER: Lots of loan officers are going to hate me for saying this, but no — I do not think adjustable-rate mortgages are a good idea. They’re a bad idea now, they were a bad idea in the past, and they are a bad idea in the future.

Lenders are pushing adjustable-rate loans these days because lots of potential home buyers are hesitant to buy because rates have gone up in the past several months.

Currently a five-year ARM starts with a rate of 4.75 percent, compared to about 5.5 percent for a 30-year fixed-rate mortgage.

Yes, it’s true that an ARM will allow for lower monthly payments as you begin paying off the loan. The other side of the coin: if interest rates continue upward, your monthly mortgage payment goes up too. Interest rates might climb to the point that you can no longer afford to make your monthly payments.

If you can’t afford the house using a 30 year fixed-rate mortgage, that’s a strong clue that you can’t afford the house, no matter what loan you have.

“Instead of finding a different loan, you need to find a different [lower-priced] house, says Greg McBride, chief financial officer of Bankrate.com.

The saving grace is that, if rates decline you can refinance at a lower rate. So it’s not like you’re betting the farm with an ARM.

But be aware, some ARMs will requires fees or penalties if you pay off the loan or refinance early. That can cost many thousands of dollars, so research the potential fees if you’re contemplating an Adjustable Rate Loan.

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