Are Adjustable Rate Mortgages Good or Bad for Your Credit?
While mortgage interest rates are still near historically low levels, they have recently begun creeping up.
As a result, potential home buyers are faced with reducing their expectations for how much home they can afford. However, some are once again looking at adjustable rate mortgages (ARMs) as a solution.
This could make sense for some folks.
Especially with rates on adjustable mortgages a full point or more below conventional 30-year rates.
Are adjustable rate mortgages good or bad for your credit? But before we answer that, let’s take a look back to the last time ARMs were a popular option.
In 2006, at the height of the real estate boom, ARMs made up about one-third of all mortgages given.
It was believed home values would continue to increase forever and homeowners could refinance in the future as their rates adjusted upward.
However, when the real estate market collapsed, the default rate on homes with these adjustable mortgages was more than three times that of fixed-rate loans.
“The reason many people find
ARMs enticing is short sighted.”
They see their initial rate is lower, and therefore their payments will be lower – at first. They hope for an increase in either the value of the home they are buying, an increase in income or both.
However, as is often the case…
Higher income simply results in higher spending.
The value of the home may increase, but qualifying for and completing a favorable refinance is not a sure thing.
The result may be your mortgage payment outpaces your ability to keep up.
So, to answer the question we initially asked, the answer is it depends. If you are able to meet the increasing payments comfortably without having to refinance, this can be good for your credit.
However if you find yourself taking out more loans, deferring credit card payments or going deep into debt, then it is obviously not good for your credit.
If you find you can’t afford the home you want using a conventional loan, you still have options.
Try looking at smaller properties. You can also look in different areas.
Finally, you could choose to wait and save more money. This last option, while perhaps not as satisfying, is sometimes the wisest.
Photo source: quickenloans.com