Smart About Money: Should you consider an Adjustable Rate Mortgage? Yes!

Nick Maffeo

Anyone who is going to be buying a house right now should absolutely consider an adjustable rate mortgage. The key word in that sentence is “consider.”

Until recently, fixed mortgage rates were so low that – for most buyers – locking in a fixed rate was going to be the way to go. The math would have shown it clearly. Commonsense would have backed up the math.

But in a rising interest rate environment, the math and the commonsense shift for some homebuyers.

First, a little bit of history. About 15 years ago, adjustable rate mortgages got a serious black eye. While there are many different kinds of adjustable rate mortgages, the ones borrowers got burned by were usually the complicated/“bad” adjustables – especially option ARMs and negative amortization loans.

Those adjustables were generally sold and even pushed by extremely-aggressive mortgage brokers, many of whom are now rightfully out of business.

Hearing so much news about the “bad” adjustables made some people skittish of all adjustable rate loans. And that’s a shame. Because there are plain vanilla/”good” adjustable rate mortgages and they are worth taking a look at when interest rates are moving up.

As a very general example (and without getting too deep into the math for space considerations in this column), right now a traditional 30-year fixed rate mortgage would cost a borrower about $315 more a month in the first 5 years than a 5/1 “plain vanilla” adjustable. That’s almost $20,000 more in the first 60 months. Why? Because the fixed loan has a higher rate.

A plain vanilla/”good” adjustable can get a buyer into a home today at a lower rate with time to see what happens next with interest rates. Plus if interest rates go down, that “plain vanilla” adjustable will automatically adjust down too. A homeowner with a fixed rate would have to refinance.

But – people say – shouldn’t I be locking in a fixed rate before rates go up even more? The answer to that is … it depends.

These are obviously unsettling times. Fixed mortgage rates have gone up dramatically. Could they go up more? Yes. Could they go down? Yes. The trouble is that no one knows for sure what’s going to happen next. That makes people nervous on a big deal like a mortgage, and rightfully so.

Going carefully through the math for all of your mortgage options – understanding the risks and rewards – has become even more important.

To do that and get the mortgage you know for sure is right for you, you want to work with a reputable lender you can trust. They’re out there. (More than some other states, Massachusetts still has many solid local lenders who have helped local people finance properties sensibly over decades in every kind of interest rate environment.)

Basically, you’re looking for a lender with a “consulting” approach (versus an “aggressive sales culture”) – a lender offering both competitive fixed rate mortgages and simple, easy-to-understand adjustable mortgages tied to known indexes (like the Treasury rate) with predetermined-by-contract rate caps in place.

Then you want to sit with that lender and go through the math and your plans, looking at the pros & cons for you of fixed rate mortgages versus adjustables, because they both have pros & cons for every buyer.

Working with a trusted lender, homebuyers sometimes discover that a mortgage they never considered is absolutely the perfect loan for them. That is why you want to consider all your mortgage options – especially today.

Nick Maffeo is the President & CEO of Canton Co-operative Bank – right next to the Post Office – in Canton. Have a question? Email to info@cantoncoopbank.com.

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