Is an ARM loan risky?

An ARM is a calculated risk, not a reckless one, as long as you understand what you're signing up for and have an exit plan. An adjustable rate mortgage gives you a lower rate for a fixed period, usually 5, 7, or 10 years, and then adjusts annually based on market rates. A 7/1 ARM means your rate is fixed for 7 years and then adjusts every year after that. During the fixed period, you're saving money compared to a 30-year fixed rate, which is the appeal. The risk is that when the adjustment kicks in, your rate and payment could go up significantly. ARMs have rate caps that limit how much the rate can increase per adjustment and over the life of the loan, but even with caps, the payment increase can be substantial. The strategy of taking an ARM now and refinancing before the adjustment period is sound in theory. But it assumes rates will be lower when you need to refinance, which is a bet, not a guarantee. If rates are the same or higher when your fixed period ends, you're either stuck with a higher adjustable rate or refinancing into a rate that isn't much better than what you'd pay now on a 30-year fixed. An ARM makes the most sense if you're confident you'll sell or refinance within the fixed period, if the rate savings during the fixed period are meaningful enough to justify the risk, and if you can afford the worst-case payment if the rate fully adjusts and you can't refinance. If you're planning to stay in the home long-term and have no exit strategy, a fixed rate gives you certainty that an ARM doesn't.

An ARM is a calculated risk, not a reckless one, as long as you understand what you're signing up for and have an exit plan. An adjustable rate mortgage gives you a lower rate for a fixed period, usually 5, 7, or 10 years, and then adjusts annually based on market rates. A 7/1 ARM means your rate is fixed for 7 years and then adjusts every year after that. During the fixed period, you're saving money compared to a 30-year fixed rate, which is the appeal. The risk is that when the adjustment kicks in, your rate and payment could go up significantly. ARMs have rate caps that limit how much the rate can increase per adjustment and over the life of the loan, but even with caps, the payment increase can be substantial. The strategy of taking an ARM now and refinancing before the adjustment period is sound in theory. But it assumes rates will be lower when you need to refinance, which is a bet, not a guarantee. If rates are the same or higher when your fixed period ends, you're either stuck with a higher adjustable rate or refinancing into a rate that isn't much better than what you'd pay now on a 30-year fixed. An ARM makes the most sense if you're confident you'll sell or refinance within the fixed period, if the rate savings during the fixed period are meaningful enough to justify the risk, and if you can afford the worst-case payment if the rate fully adjusts and you can't refinance. If you're planning to stay in the home long-term and have no exit strategy, a fixed rate gives you certainty that an ARM doesn't.

Given the way that rates are currently, an ARM can quite possibly result in a much higher payment after the adjustment period. Keith Jean-Pierre Managing Principal The Dapper Agents Operations In: NY, NJ, FL & CA

An Adjustable-Rate Mortgage (ARM) isn’t automatically risky, but it does depend on your long-term plans. ARMs usually start with a lower interest rate that adjusts after a set number of years. If you plan to sell or refinance before that adjustment, it can save you money. If you plan to stay long-term, you’ll want to understand how high that rate could go so there are no surprises down the road.

The risk assessment depends on you and your long term goals. An ARM can be a great tool if approached in the correct way. Do your research to determine what the financial saving may be and the risk involved if the rates change up or down. Find a local lender (or two) that will be straightforward with you about the program and not just try to sell you a loan. Anticipating mortgage rates changes is like gambling or predicting the weather. There is some skill involved as well as an element of chance.