{"id":171507,"date":"2024-05-06T14:38:50","date_gmt":"2024-05-06T20:38:50","guid":{"rendered":"https:\/\/www.biggerpockets.com\/blog\/?p=171507"},"modified":"2024-05-16T07:10:13","modified_gmt":"2024-05-16T13:10:13","slug":"are-adjustable-rate-mortgages-dangerous-or-a-lifeline-for-lower-rates","status":"publish","type":"post","link":"https:\/\/www.biggerpockets.com\/blog\/are-adjustable-rate-mortgages-dangerous-or-a-lifeline-for-lower-rates","title":{"rendered":"Are Adjustable Rate Mortgages a Lifeline for Lower Rates? Or the Most Dangerous Thing You Could Do?"},"content":{"rendered":"\n\n      <iframe loading=\"lazy\" frameborder=\"0\" height=\"200\" scrolling=\"no\" src=\"https:\/\/playlist.megaphone.fm\/?e=BIGPOC9012499366\" width=\"100%\"><\/iframe>\r\n  \n\n\n\n\n<p><span data-preserver-spaces=\"true\">If, like me, you check&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.biggerpockets.com\/blog\/what-is-a-mortgage\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">mortgage<\/span><\/a><span data-preserver-spaces=\"true\">&nbsp;interest rates like an expectant parent checks their wife&#8217;s contractions, you doubtless will have analyzed every type of loan product in an attempt to inch the currently high rates down.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Famed financial guru Suze Orman recently appeared on&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.cnn.com\/2024\/05\/01\/business\/video\/real-estate-buy-rent-orman-ebof-digvid\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">CNN<\/span><\/a><span data-preserver-spaces=\"true\">&nbsp;extolling the virtues of an adjustable rate mortgage (ARM). But to many American homebuyers, mentioning an ARM is like the Ghost of Christmas Past returning to haunt us once more: Weren&#8217;t ARMs partly to blame for the 2008 financial crash?&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">ARMs were derided in 2008 because many Americans got into financial trouble. Once their interest rates adjusted upward after three, five, or seven years, borrowers could not refinance down to a lower rate and fell into foreclosure. So why is Orman\u2014whose monetary advice tends to be conservative\u2014suggesting we go ice skating on a financial frozen lake?<\/span><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">Live to Fight Another Day<\/span><\/h2>\n\n\n\n<p><span data-preserver-spaces=\"true\">Such has been the<\/span><span data-preserver-spaces=\"true\">&nbsp;accelerated rise in interest rates&nbsp;<\/span><span data-preserver-spaces=\"true\">that<\/span><span data-preserver-spaces=\"true\">&nbsp;many would-be buyers and current investors&nbsp;<\/span><span data-preserver-spaces=\"true\">have found themselves<\/span><span data-preserver-spaces=\"true\">&nbsp;gasping for air to afford a new home, investment, or refinance.<\/span><span data-preserver-spaces=\"true\">&nbsp;<\/span><span data-preserver-spaces=\"true\">This<\/span><span data-preserver-spaces=\"true\">&nbsp;is particularly true if you have a high-interest rate bridge loan and&nbsp;<\/span><span data-preserver-spaces=\"true\">were expecting<\/span><span data-preserver-spaces=\"true\">&nbsp;a&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.biggerpockets.com\/guides\/how-to-refinance-your-mortgage\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">refinance<\/span><\/a><span data-preserver-spaces=\"true\">&nbsp;to provide you with a soft landing of a new 4% rate. In this instance, an ARM could be the difference between sinking or swimming.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">So&nbsp;<\/span><span data-preserver-spaces=\"true\">living<\/span><span data-preserver-spaces=\"true\">&nbsp;to fight another day is better than not fighting at all.&nbsp;<\/span><span data-preserver-spaces=\"true\">Most experts agree that rates will eventually come down, so staying afloat until that happens<\/span><span data-preserver-spaces=\"true\">, in theory,<\/span><span data-preserver-spaces=\"true\">&nbsp;makes sense.<\/span><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">House Prices Always Go Up<\/span><\/h2>\n\n\n\n<p><span data-preserver-spaces=\"true\">&#8220;If you can afford to buy, you always buy,&#8221; said Orman, shrugging off the news that with higher rates, it&#8217;s now cheaper to rent than buy. Her logic? House prices always rise, and getting into the game as soon as possible is&nbsp;<\/span><span data-preserver-spaces=\"true\">always<\/span><span data-preserver-spaces=\"true\">&nbsp;beneficial in the long run.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Orman&#8217;s thinking is straightforward for homebuyers looking for a personal residence&nbsp;<\/span><span data-preserver-spaces=\"true\">with no<\/span><span data-preserver-spaces=\"true\">&nbsp;interest in investing. For investors, however, renting a personal residence while buying an investment is the way to go, not purely for the tax benefits (in the current market,&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.biggerpockets.com\/blog\/rental-property-cash-flow-analysis\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">cash flow<\/span><\/a><span data-preserver-spaces=\"true\">&nbsp;is likely to be compromised), but because when rates do eventually come down, investors will come flooding back, and prices will increase.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">&#8220;I&#8217;ve always been an advocate of ARMs, especially for investors, when the market justifies it,&#8221; Caeli Ridge, president of&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/ridgelendinggroup.com\/\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">Ridge Lending Group<\/span><\/a><span data-preserver-spaces=\"true\">, who specializes in investor financing, told BiggerPockets. &#8220;The average shelf life of a mortgage on a rental property is five years. So, I would 100% recommend an investor to take the ARM if it is 0.5% to 1% lower. The chances of the mortgage&nbsp;<\/span><span data-preserver-spaces=\"true\">being refinanced<\/span><span data-preserver-spaces=\"true\">&nbsp;or for a lower rate or a&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.biggerpockets.com\/blog\/cash-out-refinance-vs-heloc\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">cash-out refinance<\/span><\/a><span data-preserver-spaces=\"true\">&nbsp;is high, not to mention the possibility of a&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.biggerpockets.com\/blog\/1031-exchange\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">1031 exchange<\/span><\/a><span data-preserver-spaces=\"true\">&nbsp;via a sale.&#8221;&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Ridge stresses caution when considering an ARM for a personal residence, saying that unless you can find a rate markedly lower than a 30-year fixed<\/span><span data-preserver-spaces=\"true\">, it\u2019s not always worth it<\/span><span data-preserver-spaces=\"true\">.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">According to&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.cnbc.com\/2024\/05\/01\/demand-for-riskier-adjustable-rate-mortgages-hits-highest-level-of-the-year.html\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">CNBC<\/span><\/a><span data-preserver-spaces=\"true\">, \u201cThe average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($766,550 or less) increased to 7.29% last week from 7.24% the previous week, with points decreasing to 0.65 from 0.66 (including the origination fee) for loans with a 20% down payment. Meanwhile, the average contract interest rate for 5\/1 ARMs fell&nbsp;<\/span><span data-preserver-spaces=\"true\">to<\/span><span data-preserver-spaces=\"true\">&nbsp;6.60% from 6.64%.\u201d ARMs need to&nbsp;<\/span><span data-preserver-spaces=\"true\">be refinanced<\/span><span data-preserver-spaces=\"true\">&nbsp;<\/span><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">Is Waiting for Rates to Drop Good Advice?<\/span><\/h2>\n\n\n\n<p><span data-preserver-spaces=\"true\">Waiting for interest rates to drop is a gamble. If rates fall and prices increase, investors must calculate how much they can gain by playing the waiting game.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Different parts of the country will&nbsp;<\/span><span data-preserver-spaces=\"true\">not<\/span><span data-preserver-spaces=\"true\">&nbsp;appreciate at&nbsp;<\/span><span data-preserver-spaces=\"true\">the same rate<\/span><span data-preserver-spaces=\"true\">.<\/span><span data-preserver-spaces=\"true\">&nbsp;Areas that have experienced dramatic price increases (<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.wsj.com\/economy\/housing\/once-americas-hottest-housing-market-austin-is-running-in-reverse-94226027#\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">Austin, Texas<\/span><\/a><span data-preserver-spaces=\"true\">&nbsp;notably being one) and other&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.marketwatch.com\/picks\/5-major-cities-where-pros-predict-home-prices-are-likely-to-drop-next-1c820ca9\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">Sunbelt areas<\/span><\/a><span data-preserver-spaces=\"true\">&nbsp;<\/span><span data-preserver-spaces=\"true\">where there has been<\/span><span data-preserver-spaces=\"true\">&nbsp;increased inventory due to new construction have seen prices drop.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Until existing inventory&nbsp;<\/span><span data-preserver-spaces=\"true\">is filled<\/span><span data-preserver-spaces=\"true\">&nbsp;and overheated prices return to normal, it&#8217;s unlikely prices will increase much, even with lower rates, so waiting could make more sense\u2014especially for prospective buyers&nbsp;<\/span><span data-preserver-spaces=\"true\">who currently have<\/span><span data-preserver-spaces=\"true\">&nbsp;low rates or whose rent is lower than a mortgage payment would be.&nbsp;<\/span><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">Things Prospective Buyers Can Do to Lower Rates<\/span><\/h2>\n\n\n\n<p><span data-preserver-spaces=\"true\">You are not entirely beholden to the machinations of the Federal Reserve.&nbsp;<\/span><span data-preserver-spaces=\"true\">There are certain things you&nbsp;<\/span><span data-preserver-spaces=\"true\">do<\/span><span data-preserver-spaces=\"true\">&nbsp;now to help lower your rate if you&nbsp;<\/span><span data-preserver-spaces=\"true\">simply<\/span><span data-preserver-spaces=\"true\">&nbsp;have to buy:<\/span><span data-preserver-spaces=\"true\">&nbsp;<\/span><\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li><strong><span data-preserver-spaces=\"true\">Improve your credit score:<\/span><\/strong><span data-preserver-spaces=\"true\">&nbsp;A proven track record of being financially responsible is the best way to&nbsp;<\/span><span data-preserver-spaces=\"true\">be assured<\/span><span data-preserver-spaces=\"true\">&nbsp;of&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.wsj.com\/buyside\/personal-finance\/mortgage-rates-by-credit-score-287bb3d8?&amp;mod=article_inline\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">increasing your credit score<\/span><\/a><span data-preserver-spaces=\"true\">&nbsp;and getting the lowest rate.<\/span><\/li>\n\n\n\n<li><strong><span data-preserver-spaces=\"true\">Buy down points:<\/span><\/strong><span data-preserver-spaces=\"true\">&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.wsj.com\/buyside\/personal-finance\/what-are-mortgage-points-01656602632?mod=article_inline\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">Buying down points<\/span><\/a><span data-preserver-spaces=\"true\">&nbsp;means paying money upfront to buy down percentage points on your interest rate. Again, you would need to&nbsp;<\/span><span data-preserver-spaces=\"true\">make a calculation<\/span><span data-preserver-spaces=\"true\">&nbsp;based on the time you intend to keep the property and the likelihood&nbsp;<\/span><span data-preserver-spaces=\"true\">interest<\/span><span data-preserver-spaces=\"true\">&nbsp;rates will decrease.<\/span><\/li>\n\n\n\n<li><strong><span data-preserver-spaces=\"true\">Get an FHA-backed loan:<\/span><\/strong><span data-preserver-spaces=\"true\">&nbsp;Loans backed by the government, such as Federal Housing Administration (FHA)-backed and Veterans Affairs (VA)-backed loans, tend to have lower rates than conventional or jumbo loans because they come with the federal government&#8217;s protection.<\/span><\/li>\n\n\n\n<li><strong><span data-preserver-spaces=\"true\">Make a larger down payment:<\/span><\/strong><span data-preserver-spaces=\"true\">&nbsp;If you have assets in the stock market or elsewhere that are not appreciating much, it might be worth liquidating them to put a larger&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.biggerpockets.com\/blog\/down-payment\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">down payment<\/span><\/a><span data-preserver-spaces=\"true\">&nbsp;on a home,&nbsp;<\/span><span data-preserver-spaces=\"true\">which will save<\/span><span data-preserver-spaces=\"true\">&nbsp;you money on your monthly mortgage payment.<\/span><\/li>\n\n\n\n<li><strong><span data-preserver-spaces=\"true\">Take out a shorter-term loan:&nbsp;<\/span><\/strong><span data-preserver-spaces=\"true\">Shorter-term loans (such as 15-year mortgages) come with lower interest rates but higher monthly payments. However, they can save you thousands in the long term.&nbsp;<\/span><span data-preserver-spaces=\"true\">Alternatively, you can&nbsp;<\/span><span data-preserver-spaces=\"true\">simply<\/span><span data-preserver-spaces=\"true\">&nbsp;make extra payments toward your principal to pay down the loan quicker,&nbsp;<\/span><span data-preserver-spaces=\"true\">giving you the flexibility<\/span><span data-preserver-spaces=\"true\">&nbsp;to switch back to a 30-year loan if necessary.<\/span><\/li>\n<\/ul>\n\n\n\n<h2 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">Final Thoughts<\/span><\/h2>\n\n\n\n<p><span data-preserver-spaces=\"true\">There is a lot of one-size-fits-all information floating around online. While much of it\u2014such as Suze Orman&#8217;s advice\u2014makes for good sound bites and clickbait, working out what&#8217;s best for you requires a deep dive with a lot of specificity.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Knowing how long you plan to own a home, the cost of refinancing, and all the loan options available&nbsp;to you&nbsp;will help you decide. Adjustable rate mortgages are good in theory for certain&nbsp;situations,&nbsp;but now would not appear to be one of them, especially for personal residences. Talking to a reputable lender that offers a wide variety of loan products to compare and contrast your options, especially if you are an investor, is&nbsp;a good&nbsp;first step.<\/span><\/p>\n\n\n\n    \n  <div id=\"visibility-group-block_294258ba8782d1a4eee14181edd3c5dc\" class=\"visibility-group  hidden\">\n        \n\n<div id=\"hero-block_133964cf6f0879109fcd968ba64f4443\" class=\"first:mt-0 hero-block py-4  alignwide   has-background has-theme-gold-light-background-color has-text-color has-theme-gold-color\">\n    <div\n        class=\" flex flex-wrap lg:flex-nowrap max-w-screen-xl mx-auto px-4 relative lg:items-center \">\n\n        <div class=\"relative z-30 w-full \">\n            <main class=\"py-4\">\n                \n\n<p class=\"has-theme-gold-color has-text-color has-large-font-size\" style=\"font-style:normal;font-weight:800\">Get the Best Loan Today<\/p>\n\n\n\n<p class=\"my-3 md:my-5 lg:my-8 has-slate-900-color has-text-color\" style=\"font-size:16px\">Find trusted, <em><strong>investor-friendly<\/strong><\/em> lenders who specialize in your strategy. <\/p>\n\n\n\n<p><\/p>\n\n\n\n<div id=button-custom-event-block_1f112f0a3145451ad5725a9c7cdf2a47 class='button-custom-event'>\n      <a href=\"https:\/\/www.biggerpockets.com\/business\/finder\/lenders\" x-on:click=\"window.analytics.track(&#039;Blog Block | B2C Marketplace Lender Finder&#039;, {\n      referrer: &#039;https:\/\/www.biggerpockets.com\/blog\/are-adjustable-rate-mortgages-dangerous-or-a-lifeline-for-lower-rates&#039;,\n    });\" class=\" btn-shape inline-block no-underline has-background has-theme-gold-background-color has-text-color has-white-color\" target=\"_blank\">Find a Lender<\/a>\n  <\/div>\n\n            <\/main>\n        <\/div>\n\n                <div class=\" first:mt-0 relative h-full lg:flex lg:items-center\">\n            <img decoding=\"async\" class=\"object-cover w-full relative z-20 my-0  rounded-md hidden lg:block\" src=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2022\/08\/Marketplace-Blog-Blocks-Lender-v3.png\" alt=\"investor friendly lender, investor friendly real estate loans\" title=\"\">\n        <\/div>\n            <\/div>\n<\/div>\n\n  <\/div>\n  \n\n\n<div class=\"wp-block-group\"><div class=\"wp-block-group__inner-container is-layout-constrained wp-block-group-is-layout-constrained\">\n    \n  <div id=\"visibility-group-block_64dd31c79f00f\" class=\"visibility-group  \">\n        \n\n<div style=\"height:10px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<div id=\"hero-block_64dd2875dba9d\" class=\"first:mt-0 hero-block py-4    has-background has-slate-100-background-color has-text-color has-theme-slate-color\">\n    <div\n        class=\" flex flex-wrap lg:flex-nowrap max-w-screen-xl mx-auto px-4 relative lg:items-center \">\n\n        <div class=\"relative z-30 w-full \">\n            <main class=\"py-4\">\n                \n\n<h3 class=\"wp-block-heading my-0 tracking-tight font-extrabold has-theme-slate-dark-color has-text-color has-large-font-size\">Join the community<\/h3>\n\n\n\n<p class=\"my-3 md:my-5 lg:my-8 has-theme-slate-color has-text-color\" style=\"font-size:16px;font-style:normal;font-weight:400\">Ready to succeed in real estate investing? Create a free BiggerPockets account to learn about investment strategies; ask questions and get answers from our community of +2 million members; connect with investor-friendly agents; and so much more. <\/p>\n\n\n\n<div id=button-custom-event-block_64dd2888dba9e class='button-custom-event'>\n      <a href=\"https:\/\/www.biggerpockets.com\/signup\" x-on:click=\"window.analytics.track(&#039;Blog Block | Acquisition | Free Membership Signup&#039;, {\n      referrer: &#039;https:\/\/www.biggerpockets.com\/blog\/are-adjustable-rate-mortgages-dangerous-or-a-lifeline-for-lower-rates&#039;,\n    });\" class=\" btn-shape inline-block no-underline has-background has-theme-blue-background-color has-text-color has-white-color\" target=\"_blank\">Sign Up<\/a>\n  <\/div>\n\n            <\/main>\n        <\/div>\n\n            <\/div>\n<\/div>\n\n\n<div style=\"height:10px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n  <\/div>\n  <\/div><\/div>\n","protected":false},"excerpt":{"rendered":"<p>If, like me, you check&nbsp;mortgage&nbsp;interest rates like an expectant parent checks their wife&#8217;s contractions, you doubtless will have analyzed every type of loan product in an attempt to inch the [&hellip;]<\/p>\n","protected":false},"author":613725,"featured_media":171509,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[7402,7119,7383],"tags":[],"class_list":["post-171507","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-traditional-loans","category-biggerpockets-daily","category-economics"],"acf":[],"comment_count":0,"_links":{"self":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/171507","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/users\/613725"}],"replies":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/comments?post=171507"}],"version-history":[{"count":0,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/171507\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media\/171509"}],"wp:attachment":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media?parent=171507"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/categories?post=171507"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/tags?post=171507"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}