Why Dave Ramsey Says You Should Ditch Your Adjustable-Rate Mortgage

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  • An adjustable-rate mortgage can offer some initial savings on your home loan payments.
  • But over time, those payments could get a lot more expensive.

You don't want to risk having to pay more over time.

Mortgage rates have been on the rise since the start of the year. If you signed a mortgage over the past four months or so, you may have opted for an adjustable-rate mortgage, or ARM, due to the initial savings involved. Or, you may have signed an ARM long ago. But while that may have seemed like a good choice at the time, financial expert Dave Ramsey warns that hanging onto an ARM could have unfavorable financial consequences. 

The problem with having an adjustable-rate mortgage

Adjustable-rate mortgages start with the same interest rate for a preset period of time but can then change based on market conditions. With a 5/1 ARM, for example, you're guaranteed your initial interest rate for five years. After that, the rate on your mortgage can adjust once a year, either upward or downward.

Often, though, an ARM will end up adjusting upward. And so while you might lock in a lower interest rate for five years on a 5/1 ARM compared to a 30-year mortgage, in the long run, that ARM could end up costing you a lot more.

In fact, Ramsey insists that many mortgage borrowers are lured in by attractive initial borrowing rates on ARMs, only to then regret that decision later once their rates start to rise. And so if you'd rather not run the risk of your mortgage getting way more expensive down the line, you may want to refinance your ARM to a fixed-rate loan -- even today, when fixed loan rates are higher. 

Right now, inflation is wreaking havoc on consumers, and the Federal Reserve is trying to fix that issue by rapidly hiking up interest rates. The logic is that if it becomes very expensive for consumers to borrow money, they'll start spending less. Once that happens, it will narrow the gap between supply and demand so that inflation can start to cool. 

But because the Fed is on a mission to raise interest rates, mortgage borrowers whose ARMs have been in place for a while could see their rates adjust upward. And that's a very risky thing, especially if you're already having a hard time keeping up with your housing payments. 

Does an ARM ever make sense?

It can. If you're buying a home you truly don't expect to live in for more than a handful of years, then an ARM could be a wise choice, because by the time your rate is able to adjust, you'll be out of there (at least if all goes according to plan). 

So, say you're buying a starter home while you go through a four-year graduate school program, and you're certain you'll sell that home and move elsewhere once your studies conclude. In that case, a 5/1 ARM could make sense. 

But if you're buying what you think will be your forever home, you may want to steer clear of an ARM and stick to a fixed-rate mortgage. What you lose in initial savings, you could gain in the form of stability throughout your repayment period.

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