Suze Orman Has an Important Warning Every Home Buyer Needs to Hear

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  • More home buyers are considering adjustable-rate mortgages (ARMs) right now, due to higher interest rates.
  • Suze Orman admitted they may look like an attractive option.
  • Orman explained there are serious risks with ARMs, since mortgage payments with one are only predictable for that initial period of fixed interest.

Don't buy a home without reading Orman's warning first.

If you're thinking about buying a home, you probably are not very happy with today's mortgage rates. Although the rates aren't excessively high by historical standards, they are much higher than they were just a short time ago. This means you'll pay more financing charges and have a larger monthly payment to contend with if you borrow for a property now.

In light of the fact that mortgage rates are up, Suze Orman explains that more people are considering ARMS -- but she thinks this may be a very bad idea for most buyers.

Here's what Orman had to say, and why she warns that taking out an adjustable-rate mortgage could be a decision you'll end up regretting.

Here's why Orman believes ARMs are dangerous

Orman explained in a podcast episode that high rates drive an increased interest in ARMs (or adjustable-rate mortgages) for a simple reason. "The initial rate on an ARM will always be lower than the current rate for a fixed-rate mortgage," Orman said.

When you take out an adjustable-rate mortgage, the rate is locked in for a period of time, then begins to fluctuate. It's tied to a financial index and your rate, monthly payment, and total borrowing costs can all go up if the index shows rising rates.

Since banks are more protected with ARMs since consumers pay more if rates rise, they offer a lower initial starting interest rate.

The issue is, these loans may seem more affordable at the beginning, but you'll go into buying a home with a lot of uncertainty. You can't predict exactly when rates will change or how high they'll go, so you take the chance of your mortgage becoming a lot more expensive.

And Orman warns this can be a dangerous risk and urges buyers to be "very careful in making your mortgage choice."

Home buyers need to listen to Orman on this issue

Orman is exactly right that ARMs are high-risk loans, and it's a good idea to be cautious about them. ARM rates can and do go up. You don't want to end up not being able to afford your home because your rate has risen so much.

Orman suggests a number of questions you should get answers to before taking out an ARM, including asking how much your rate can go up with each adjustment and over time. She also recommends considering what you'll do if you can't refinance before your loan rates start rising.

Rather than opting for an ARM -- and the lower initial payments that come with it -- Orman also suggested cutting housing costs in other ways besides taking out a risky loan. Her tips include opting for a smaller home or buying in a neighborhood that's a little further away and thus a little cheaper.

"Reducing the amount you need to borrow is the best way to combat rising mortgage costs," she said. And this indeed is a better choice than getting an ARM. If you buy a smaller or cheaper home you can afford even with a fixed-rate loan, you'll have a lot more peace of mind that your payment will remain affordable going forward.

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