Adjustable-rate mortgages, or ARMs, have become a popular mortgage option for homeowners in today’s housing market. According to Experian, 8% of all new mortgages in 2023 are adjustable-rate mortgages. This percentage continues to steadily increase.
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Popular personal finance expert Dave Ramsey, host of “The Ramsey Show” and owner of Ramsey Solutions, weighed in on why adjustable-rate mortgages are a bad option when looking into financing a home. Here are 2 main reasons why ARMs are a bad idea, according to Ramsey.
You Will Deal With Fluctuating Interest Rates
“Interest rates are moving up,” said Dave Ramsey on his podcast, “And you are investing in [a mortgage] that gives you the probability of higher interest rates later.”
A fixed-rate mortgage does not deal with the complicated increase and decrease of interest rates as the housing market. However, an adjustable-rate mortgage will ebb and flow with the instability of the housing market. This includes when interest rates are at a low point.
“Your adjustable-rate mortgage is going to go up, even if rates go down a little,” Ramsey said to his podcast audience. “Your mortgage is adjusted based on an index, and a spread over the index.”
According to Ramsey, if you were to purchase a home today with an ARM, you would be paying a higher interest rate based on the index.
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It Is a Short-Term Solution
“You bought the house on short-term thinking,” Ramsey said on “The Ramsey Show” — “On the first adjust [under an ARM] you’re going to see an increase.”
Many people, desperate to find homes in today’s volatile and ever-changing market, will see an adjustable-rate mortgage as an easy, short-term solution that can help them purchase their dream home immediately. Ramsey warned his listeners that this short-term solution is not a gamble — while ARMs may seem like a viable option, by the time the first adjustment occurs, homebuyers will see their interest rates increase.
The Bottom Line Concerning Today’s Real Estate Market
In 2023’s market, studies have shown that many prospective homebuyers are choosing an adjustable rate mortgage for their home.
Though mortgage companies want customers to have adjustable rate mortgages, Ramsey cautions that these mortgages are harmful to an individual’s finances and will lead to a steady increase in interest payments over time. Ramsey’s firm belief is that mortgage companies and credit bureaus are encouraging individuals to make this decision to benefit themselves, rather than homebuyers.
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This article originally appeared on GOBankingRates.com: Dave Ramsey: 2 Reasons Adjustable-Rate Mortgages Are a Bad Idea
