Dave Ramsey Says You're 'Playing With Fire' if You Take Out This Type of Mortgage

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  • There are different types of mortgage loans, but it's always important to make sure your loan is affordable.
  • Dave Ramsey warns an adjustable-rate mortgage could be dangerous.

Don't get a mortgage without reading this important warning from Dave Ramsey.

When you borrow to buy a home, you have to make sure you research all of your loan options. You'll want to get a mortgage you can comfortably afford for the entire life of the loan.

Unfortunately, there are certain types of loans that expose you to much more risk than others. Finance expert Dave Ramsey warned about a specific kind of loan you may want to steer clear of.

This type of mortgage could be dangerous, Ramsey says

According to Ramsey, adjustable-rate mortgages could be a very high-risk type of mortgage loan.

An adjustable-rate mortgage, or ARM, is a loan that has an initial interest rate that's generally lower than the rate you would be offered if you opted for a fixed-rate mortgage instead. However, the catch is that this initial rate is guaranteed only for a short time such as three years or five years, while a fixed-rate loan has a rate that will remain unchanged during your entire payback period.

The fact that your rate can change with an ARM is a huge cause of concern, according to Ramsey.

"Look, it doesn't matter if it's a three-year or a five-year ARM -- the fact is, your interest rate is adjustable (which means your rate isn't locked in forever and will go up!), and you'll have zero control over it," Ramsey warned. "When you get an ARM, you're playing with fire -- why take the risk?"

Should you listen to Ramsey?

Ramsey is absolutely right that an ARM is a dangerous option for most home buyers. The sad reality is, you could see your total borrowing costs and interest rates go up dramatically if your financing cost is not locked in. When you don't have a fixed-rate loan, rising rates for ARMs could lead to disaster. This has been a big problem for people in the past.

"If that rate is sky-high, your mortgage payments will be too… potentially leaving you unable to pay your mortgage," Ramsey warned. "That's exactly what happened back when the housing market crashed in 2008, causing foreclosures and bankruptcies galore."

While some borrowers believe they will be able to refinance to a more affordable loan if rates rise, this isn't a great strategy. ARMs become more expensive only if a benchmark financial index shows rates are rising. That means if your rate is going up on your ARM, chances are good that any other mortgage you could get would have a high rate too. If rates are rising because the economy is going south, this could affect your income and your ability to refinance as well.

You don't want to gamble your home on a bet that rates won't rise or a bet that you'll be able to afford to pay more if they do. If you are considering an ARM, you should know exactly how high your payment could climb, and you should make sure that larger amount is affordable at your current income level. If that's not the case, steer clear. And even if you could afford to pay a higher rate in the future, think about whether that's something you want to do or whether you'd rather choose the safer option and ensure your housing costs remain well within your budget.

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