Adjustable-Rate Mortgages Backfire for Many Borrowers. The Opposite Happened to Us

Although ARMs are risky, they can sometimes work out in your favor.

There's a reason home buyers are often urged to sign a fixed-rate loan as opposed to an adjustable-rate mortgage, or ARM. When you take out an ARM, you're only guaranteed the same interest rate on your mortgage for a limited period of time. From there, the rate on your home loan has the potential to climb, thereby rendering your monthly payments more expensive and much harder to fit into your budget.

In fact, a lot of people who sign up for an ARM end up regretting it. But the interest rate on your ARM isn't guaranteed to rise over time. In some cases, it can fall, leaving you with lower monthly payments. That's what happened to me and my husband when we owned our previous home -- and it benefitted us financially in a very big way.

Sometimes, ARMs do work out

My husband signed an adjustable-rate mortgage on his home before he and I met. But once I moved into the home he owned, we began splitting the cost of the mortgage and other associated costs, like property taxes.

At the time I moved in, he still had a couple of years left on his ARM before the interest rate on that mortgage had the potential to climb. So what we did during that period was stash extra money away in our savings account in case our mortgage costs wound up rising.

Only that didn't happen. Instead, the rate on our ARM went down, and our mortgage payments shrunk by more than $100 a month. So instead of having to bear extra costs, we were suddenly in a stronger position to manage our bills.

Now incidentally, at the time the rate on the mortgage we were paying adjusted downward, our property tax bill went up. So we didn't come out ahead as far as our total housing costs were concerned. But still, we got to enjoy a number of months of lower mortgage payments before we sold that old house and moved into our current one.

Is an adjustable-rate mortgage right for you?

Signing an ARM means taking on a fair amount of risk. But in some cases, an ARM can work out in your favor. That's because it might allow you to lock in a lower interest rate on your mortgage initially, and then benefit from a lower interest rate down the line.

That said, if you're going to take out an adjustable-rate mortgage, it's best to do what we did -- assume your loan's interest rate will increase in time, and pad your savings to allow for that. That way, you won't risk falling behind on your mortgage.

Remember, too, that if you sign an ARM and your rate increases a lot over time, you may be able to refinance to a fixed-rate mortgage with a lower interest rate. In fact, some people sign an ARM with the express intent to refinance before their interest rate has time to change. This, too, can be a risky move, because you never know when mortgage rates will rise across the board, and refinancing may not always be a money-saving option.

The point, however, is that taking out an adjustable-rate mortgage won't always come back to bite you. And so you may not want to write off that option from the start, even though it can be risky.