This Is the One Type of Mortgage You Might Sorely Regret

Be very careful when signing up for a home loan.

Most people who want to buy a home don't have enough cash sitting around to make the purchase outright. That's where mortgages come in.

Now one thing you may not like about getting a mortgage is having to pay interest on that loan. And that's understandable. And so you may be eager to find ways to save money in that regard.

Now often, if you sign up for an adjustable-rate mortgage, or ARM, you'll snag a lower interest rate initially than you might get with a fixed-rate loan. But while an ARM might seem like a good deal, it can easily backfire.

The danger of getting an ARM

As of this writing, the average 30-year mortgage rate is 5.668%, while the average 7/1 ARM rate is 4.847%. Clearly, the latter is a much lower interest rate. And so you may be inclined to go for the ARM, even if it means taking on the risk that your rate could start to climb after seven years.

But one thing you may not realize is that your rate has the potential to climb a lot. And that could leave you on the hook for much higher mortgage payments down the line.

And if you're thinking, "Well in that case, I'll just refinance to a loan with a lower interest rate," don't be so sure about that. As of late last year, you could sign a 30-year mortgage at or around 3%. And now look at today's rates. Nobody expected mortgage rates to rise so sharply in the course of only nine months, yet here we are.

Similarly, we don't know what the future has in store for mortgage rates. What happens if the rate on your ARM starts climbing right when mortgage rates start soaring? At that point, refinancing may not be a feasible option.

Plus, you never know if you'll fall on tough financial times and suffer credit score damage as a result. A low credit score could make it difficult for you to qualify for a refinance, or one at a favorable borrowing rate.

That's why getting an ARM is a really risky prospect. While you may be tempted by the initial savings, you could end up spending a lot more in the course of paying off your home.

A better way to save money on mortgage interest

If your goal is to keep your mortgage interest payments to a minimum, then you may want to look at signing a 15-year mortgage instead of an ARM. That way, you benefit from fixed interest and fixed monthly payments. But you can also score significant interest-related savings.

Right now, the average 15-year mortgage rate is 4.967%. Now that's still higher than what you'll get with a 7/1 ARM, but it's close. At the same time, it's much lower than the 5.668% you might pay on a 30-year mortgage.

Of course, a 15-year mortgage will mean having a larger monthly payment to cover, so you'll need to make sure that fits into your budget. But if so, you get the security of a fixed-rate loan along with interest-related savings.