Why she loves her adjustable-rate mortgage
Posted
Feb 07 2008, 07:48 PM
by
Karen Datko
Some people got in over their heads when they used an adjustable-rate mortgage to buy their home. They simply can't afford the payments when the interest rate goes up. But not all ARMs are created equal, says Madison at My Dollar Plan. For some people, like Madison, they make financial sense.
This excellent post is the type of tutorial many people wish they'd had before they signed on the dotted line.
Madison's ARM has a fixed interest rate for five years and can adjust each year after that, with limits on the annual and total adjustments. It also has no prepayment penalty. All of this works to Madison's benefit.
Partly because she's invested the savings she has realized with the initial low interest rate, she'll have the money to pay off the house in nine years. (She and her husband also put 20% down.) "We've given ourselves the option to ride out the interest rates," she writes. "However, I'm also ready to refinance if we need to."
This post comes with a lot of caveats. Madison says she would have gone with a fixed-rate mortgage under different circumstances -- for instance, if she had solid plans to keep the house for 10 or more years (how long you plan to keep your house is a very important part of this decision, she says), if she couldn't afford to pay off the house after the interest resets, or if she couldn't tolerate risk. We think her two final points are critical: if "we couldn't afford the maximum interest rate change that ours could adjust to" and "we couldn't afford our house without an ARM."
