Should You Get an Adjustable-Rate Mortgage Right Now? Here's What Suze Orman Says

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KEY POINTS

  • An adjustable-rate mortgage might help you snag a lower initial borrowing rate than a fixed mortgage.
  • There are dangers to getting an adjustable-rate mortgage, so Suze Orman thinks borrowers should proceed with caution.

It pays to take this advice to heart.

Today's housing market is an incredibly tough one to crack. Not only are home prices super high, but many buyers are being forced into bidding wars due to a lack of inventory. If you land in that boat, you might have to make an offer above an already high asking price just to stay competitive.

And then there are mortgage rates to think about. From mid-2020 through the end of 2021, mortgage rates sat at competitive levels, and they helped offset the higher home prices buyers were forced to grapple with.

But mortgage rates have been rising sharply since the start of 2022. And at this point, borrowing is at its most expensive level in well over a decade.

If you're looking to buy a home, you may be inclined to take out an adjustable-rate mortgage, or ARM. The upside of going this route is potentially getting to lock in an initial rate on a home loan that's lower than what you'll get with a fixed-rate product. But tempting as an ARM might be right now, financial expert Suze Orman cautions that signing one is a move you might regret.

Don't fall into a common mortgage trap

Many home buyers who take out an adjustable-rate mortgage do so under the assumption that they'll either sell their home before their rate starts to adjust upward, or that they'll simply refinance if their loan starts to get more expensive. But in a recent podcast, Orman says these aren't assumptions buyers should make.

Remember, you might think you're buying a starter home that you're only going to live in for a short period of time, but that could change. You may decide you're happy in that home, or you're going to have fewer children and therefore have enough space. And if that happens, you could get stuck with an adjustable-rate mortgage whose interest rate starts to rise rapidly over time.

Now you may be thinking, "Well, in that case, I'll just refinance." It's a good plan in theory. But what if interest rates are much higher at the time you want to refinance an ARM? If that ends up being the case, you could be sorely out of luck.

That's why Orman thinks it's generally a better idea to sign a fixed-rate mortgage. Even though borrowing rates are up right now, that way, you at least get the security of having predictable monthly mortgage payments to look forward to.

Plus, going back to refinancing, say you sign a 30-year fixed-rate loan now at 6%, only in three years, rates drop so that it's possible to snag a 4% rate instead. At that point, you can refinance on your own terms -- not because your loan's interest rate is climbing to an unaffordable degree.

Take the safe route

Orman commonly advises consumers to play it safe on the personal finance front. And that advice extends to signing a mortgage.

While getting an ARM might seem like a solid move right now, don't be lured by the initial savings involved. You might pay less interest on your home loan in the near term, but you could end up paying a lot more in the long term.

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