Is an adjustable rate ever a good idea?

[riverwed070707]

For example, if you needed your payment to be low now, but plan to pay off the loan within a year or two of the locked in rate period then it eliminates most of the risk, yes? I think its been so ingrained for me that these are bad, I'm having a hard time considering it but I don't know much about them...are there other things to consider when looking at this type of mortgage?

[disneysteve]

Yes, I think an ARM can be a good idea in specific situations. Here's an example. My cousin recently retired and moved to Florida. He is 56. He can't start drawing from his retirement accounts until age 59-1/2. Although he technically had enough available cash to pay for his new house outright, it would have seriously limited his cash flow. Instead, he took out a 5-year ARM. That gave him a super low rate and will carry him for the 3-1/2 years until he can start getting income from his considerable retirement nest egg. At that point, cash flow will no longer be a concern and he can pay off the loan. Going that route instead of a fixed interest loan will save him a bundle in interest charges.

As general advice, ARMs are to be avoided but they exist for a reason. If your situation is such that it makes sense, go for it.

[LivingAlmostLarge]

Yes when we bought our current home it was with a 7/1 arm, we paid down enough to refinance last year after 5 years to a 5/1 arm conventional mortgage $417k. We refinanced again this year to another 5/1 arm. Again the refinance was free. So the term was extended but we also are at a very low rate of 3.125% for 5 years and it caps out at 8.125%.

Friends of ours are on a floating rate of 1% for the past 3 years since his ARM expired. What he's saved in 3 years is more than the maximum rate he'll ever have to pay on the balance of the principal even if it goes up.

You have to know the risk and calculate the maximum interest. Assume after 5 years we get 8.125% for the balance what will we pay? And could we refinance? Yes at that time because now we have about 30% equity so we can handle another drop in property values along with paying down another 5 years of principal. So if the rate is above 8% we stay with the ARM. If it's still low in 5 years we could in theory get a 30 year fixed and still come out ahead in interest.

[maat55]

Personally, I would do an arm if I were determined to pay the note off within that period.

[MonkeyMama]

The problem with ARMs is when people take on more risk than they can really bear, and are overly optimistic about the future. Which of course is why so many people got into trouble.

I think most people probably should not use an ARM. BUT, I know a lot of people who took on ARMS for a loan with a loan balance and that they were very likely to pay off in 3-7 years or so. With these crazy low interest rates. No reason not to do that. If you are getting an ARM because you expect a higher income or windfall later - and need that to pay it off - that is dangerous territory. If you only have a few years left on your loan anyway and want to take advantage of low interest rates - I think it's pretty smart.