Americans taking out mortgage loans are increasingly choosing a riskier route as interest rates are climbing in conjunction with increasing house prices. Well over one third of new mortgage applicants ask for adjustable-rate mortgages (arm). At present, fixed-rate mortgage interest rates have risen over 1 percent in the past year, while arm interest rates have remained fairly constant—perhaps one reason home buyers opt for the latter. But as interest rates rise, which is widely anticipated by the financial markets, the risk grows for borrowers holding arms.
The main reason most consumers select arms is because they offer the lowest monthly payment right now. But borrowers should consider the long-term cost of the loan. While arms may appear to be a bargain today, if the short-term interest rate rises, they could cost more over the life of the loan than a fixed-rate loan. Of particular risk are those who bought a house they couldn’t afford without the low monthly payments afforded by arms today. As short-term interest rates increase, so will the cost of their mortgages.
The Wall Street Journal offers good advice to anyone considering an adjustable-rate mortgage: “[P]ay keen attention to the details. These include what index the loan is tied to, how much rates can go up in a single year and over the life of the loan, and how quickly the mortgage payments can increase” (May 20). With a fixed rate, on the other hand, the interest rate remains the same throughout the life of the loan, making it easier to determine if the home fits into your budget.
If you can afford to buy a home, don’t risk losing it later because you failed to “count the cost” (Luke 14:28). Stay within budget and avoid risky financial arrangements, and your home could turn out to be your best investment.