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Adjustable Rate Mortgages

Adjustable Rate MortgageI had a student who wanted to purchase a house to “flip”. He indicated he talked to his real estate broker and she indicated that now is not the time to get an adjustable rate mortgage. Since interest rates are low, it does not make sense to take the risk that rates will rise. Chances are …. they will.

My student indicated he would normally want a fixed rate except since he plans to flip the house, he decided he should get an adjustable rate mortgage (ARM). He came to me to make sure I agreed with his strategy. As you might expect, I did not agree with him. While I enjoy taking a fairly hefty amount of risk, I try to avoid unnecessary risk.

This particular student was arguing the week before that he is certain real estate prices were bound to drop. Consider his strategy and plan: 1) he buys a fixer at today’s prices and gets an ARM; 2) house prices fall and now he can’t sell the house and make a profit; 3) interest rates rise and now he is stuck with a dumpy house for which he overpaid and his monthly mortgage payment keeps rising.

So, when do ARMs make sense? When the risk of changing interest rates benefit YOU, not the lender.
 
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