Buying Foreclosures In San Diego: Is An Adjustable Rate Mortgage Smart?

Is an adjustable rate mortgage a smart move for those buying foreclosures in San Diego?

Bloomberg News recently revealed that more Americans are now ‘gambling’ on ARMs (adjustable rate mortgages) than they have in 5 years. Considering what happened a couple years before that, is this really an intelligent financial move?

Despite how busy the real estate market has become, it’s still difficult to resist buying foreclosures in San Diego. The discounts are still there and buyers know that if they wait, the prices are only going to keep on going higher. However, there is certainly safety in sticking with a fixed rate home loan.

Some are justifying the choice to go with an ARM with the lower rates that they provide, or because they believe they will move up by the time it adjusts. Certainly, those that are planning to flip foreclosures in San Diego, CA may not want to pay the higher interest for the security net they will never use.

However, it can get a little trickier for those planning to live in their new home. For those tight on budget right now, and who can’t afford the fixed rate, buying can still be smart, as it may be the best chance to build up a down payment for their real dream home and nest egg.

Regardless of future plans, it’s always wise to opt for a loan with a longer fixed period than you need. For example; if you plan to sell your San Diego home in 3 years, take a 5 year fixed period. If you plan to sell in 5, make sure it is fixed for the first 7 years.

If you are just hoping to refinance later, consider that while loans might become easier to get in the near future, rates will almost certainly be higher. Saving a couple hundred a month now, to end up paying a lot more later, doesn’t make sense for most average workers.

There are at least 4 scenarios in which an ARM can make a lot of sense, providing you are well aware of what the worst case scenario could be and are prepared to weather it out:

  1. Your income is different every month and you need the flexibility
  2. You are on a career path that guarantees a higher wage in the next 2 years
  3. The savings of an ARM are so significant you can use the difference to pay off the balance in just a few years
  4. You are 110% confident you can get a better return on that money elsewhere