Why Dave Ramsey Is Wrong About Adjustable Rate Mortgages
July 8, 2023
When interest rates are high, some borrowers turn to the FHA Adjustable Rate Mortgage (FHA ARM) program to get a lower introductory rate with hopes that rates will go down in the meantime before the interest rate adjustments begin.
FHA ARM loans feature an introductory rate of one to 10 years, with periodic adjustments scheduled after the introductory rate period expires. When rates are high, this is a loan that can be used to get a cheaper initial rate. Many apply for these loans knowing they will refinance at some point to avoid future rate increases.
Dave Ramsey Is Wrong About FHA ARM Loans
Some financial pundits, including Dave Ramsey, tend to rail against the Adjustable Rate Mortgage. Here’s a quote from the Dave Ramsey official site about ARM loans; under the heading, “Avoid the Worst Mortgages for first-time home buyers,” we read:
“Adjustable Rate Mortgages (ARMs): ARMs sucker you in with a low initial interest rate. But then, your lender raises your rate, and your mortgage payment goes up. No, thanks!”
It’s not surprising there’s a simple-minded view of the ARM loan promoted here. ARM loans require a bit more forethought than a standard mortgage; they aren’t for everyone and in some circles, writing populist financial advice is just easier than putting the thinking time in.
You Don’t Get Fooled Into Higher Mortgage Rates
There ARE smart uses for an ARM loan, and when you apply for an FHA ARM, there’s no getting “suckered” with a low initial rate. Yes, Ramsey’s advice is closer to sound for people who apply for an ARM loan with no strategy for managing the rate increases. But is your lender trying to fool you with an ARM?
No.
Your lender must explain the entire process to you, from how the intro rate works, which involves an offer of a lower interest rate for a limited time, to how the adjustment period works.
FHA loan rules in HUD 4000.1 explain why Dave Ramsey is wrong, and you don’t get “suckered” into a higher rate. From the FHA Lender’s Handbook:
Sure, an FHA ARM loan might be a bad idea if you apply for such a loan with no exit strategy once the interest rate adjustments begin. Dave Ramsey would be correct if you apply for an FHA home loan with an adjustable rate and simply choose to pay more when the adjustments happen.
Ramsey’s approach to home loans is flawed because there’s a degree of privilege about the advice. It assumes everyone is capable of buying a home with the goal of saving as much money over the entire transaction as possible.
Not everyone has the financial ability to approach home loans this way, and many turn to loan products like the FHA ARM loan to save money out of pocket and protect a monthly bottom line. Not everyone can afford to apply for a 15-year conventional loan, which seems to be the advice Ramsey prefers for mortgage loans.
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RELATED VIDEOS:
The ARM is an FHA Adjustable Rate Mortgage
A Few Tips About Your Fixed Rate Mortgage
Monthly Payments Establish Good Credit
FHA ARM loans feature an introductory rate of one to 10 years, with periodic adjustments scheduled after the introductory rate period expires. When rates are high, this is a loan that can be used to get a cheaper initial rate. Many apply for these loans knowing they will refinance at some point to avoid future rate increases.
Dave Ramsey Is Wrong About FHA ARM Loans
Some financial pundits, including Dave Ramsey, tend to rail against the Adjustable Rate Mortgage. Here’s a quote from the Dave Ramsey official site about ARM loans; under the heading, “Avoid the Worst Mortgages for first-time home buyers,” we read:
“Adjustable Rate Mortgages (ARMs): ARMs sucker you in with a low initial interest rate. But then, your lender raises your rate, and your mortgage payment goes up. No, thanks!”
It’s not surprising there’s a simple-minded view of the ARM loan promoted here. ARM loans require a bit more forethought than a standard mortgage; they aren’t for everyone and in some circles, writing populist financial advice is just easier than putting the thinking time in.
You Don’t Get Fooled Into Higher Mortgage Rates
There ARE smart uses for an ARM loan, and when you apply for an FHA ARM, there’s no getting “suckered” with a low initial rate. Yes, Ramsey’s advice is closer to sound for people who apply for an ARM loan with no strategy for managing the rate increases. But is your lender trying to fool you with an ARM?
No.
Your lender must explain the entire process to you, from how the intro rate works, which involves an offer of a lower interest rate for a limited time, to how the adjustment period works.
FHA loan rules in HUD 4000.1 explain why Dave Ramsey is wrong, and you don’t get “suckered” into a higher rate. From the FHA Lender’s Handbook:
- “The Mortgagee must establish the initial interest rate,” meaning you’ll be told upfront what the initial rate is and how long it will last.
- “The interest rate must remain constant for an initial period of 1, 3, 5, 7, or 10 years, depending on the ARM program chosen by the Borrower, and then may change annually for the remainder of the mortgage term.” These are predictable adjustments you will have a schedule for.
- “A 1- and 3-year ARM may increase by one percentage point annually after the initial fixed interest rate period, and five percentage points over the life of the Mortgage.” Again, predictable.
- “A 5-year ARM may either allow for increases of one percentage point annually, and five percentage points over the life of the Mortgage; or increases of two percentage points annually, and six points over the life of the Mortgage.” There are similar rules for 7 and 10-year ARM loans.
Sure, an FHA ARM loan might be a bad idea if you apply for such a loan with no exit strategy once the interest rate adjustments begin. Dave Ramsey would be correct if you apply for an FHA home loan with an adjustable rate and simply choose to pay more when the adjustments happen.
Ramsey’s approach to home loans is flawed because there’s a degree of privilege about the advice. It assumes everyone is capable of buying a home with the goal of saving as much money over the entire transaction as possible.
Not everyone has the financial ability to approach home loans this way, and many turn to loan products like the FHA ARM loan to save money out of pocket and protect a monthly bottom line. Not everyone can afford to apply for a 15-year conventional loan, which seems to be the advice Ramsey prefers for mortgage loans.
------------------------------
RELATED VIDEOS:
The ARM is an FHA Adjustable Rate Mortgage
A Few Tips About Your Fixed Rate Mortgage
Monthly Payments Establish Good Credit
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