Don’t Leap Into an ARM; Go with a 30-Year Fixed That Meets Your Budget
If you have an adjustable-rate mortgage, your future may not be as bright after the Fed's rate hike this week. You've been trying to buy a house lately. That means you're probably trying to qualify for a mortgage. And you've seen that mortgage rates are pushing 7%.
And this is why borrowers are now turning to ARMs. When's the last time you heard that in the mortgage industry? Adjustable-rate mortgages, the interest rate isn't 7%. It's about 4.9%. It has a lower rate for the first five years, but then it's variable after that. The last time we looked at this, that was years before people were interested in adjustable mortgages, because a year ago fixed rate mortgages were 2.8%. Who needed to get an adjustable mortgage when you could get a fixed rate at below three?
Well, look at what's going on these days. Because of the increase in interest rates, the monthly payment on a $300,000 mortgage, 30 year fixed - it's like $1200 if the interest rate is only 3%. But if the interest rate is six, it's $1800. That's $600 more per month. That's a huge problem. A 44% increase in your monthly payment compared to a year ago. And that's assuming the price of the house didn't go up. And we know that they did.
Over the past year, home prices skyrocketed. The median price of new homes these days, over $400,000. Housing affordability is now at the lowest level since 1989, so people struggling to buy homes are increasingly turning to ARMs, adjustable-rate mortgages - because they can't afford the fixed rate. And that's the problem because if you go to an adjustable-rate mortgage, what happens as interest rates continue to rise in the economy? That means you could be hit suddenly with a sharply increased mortgage payment in five years. And if you can't afford it, you'll be forced to sell the house. But to who? Because nobody else will be able to afford it either. That could cause the price of the house to go down. You could end up being upside down on the mortgage owing more to the lender than what the house is worth. We saw this happen rampantly in 2008 and you want to make sure you don't put yourself in that position.
Here's the bottom line. If you can't afford the monthly payment on a fixed rate mortgage, you can't afford to buy the house. It's really that simple. You need to keep renting. I'm sorry to tell it to you this way, but it's the way that it is. If you go with an adjustable-rate mortgage, you are taking a very, very big financial risk. Do not do an adjustable-rate mortgage. Go with a 30-year fixed rate loan. And if the only way to make that affordable is to buy a cheaper home, then so be it. Otherwise, your future will be filled with stress and regret. And I want you to avoid that truth about your future.