Payment certainty possible with an adjustable-rate loan

Future-Proof: Navigate Threats, Seize Opportunities at ICNY 2018 | Jan 22-26 at the Marriott Marquis, Times Square, New York

"Is there any way to benefit from the lower rates on adjustable-rate mortgages (ARMs) without risking payment increases I can't afford if rates increase sharply?" With interest rates on ARMs still attractively low but widely expected to rise, I hear this question often. Despite what you may hear to the contrary, you do not get payment certainty with the flexible-payment ARM, also called "1-Month-Option Arm," "12 MAT Pay Option ARM," "Pick a Payment Loan," "1-Month MTA," "Cash Flow Option Loan," and "Pay-Option ARM." This loan offers conditional payment certainty. Payments won't increase by more than 7.5 percent a year, provided that interest rates don't increase too much. How much is too much? That depends mainly on how low the initial payment is and how large a markup ("margin") the lender charges you. In an analysis I did last year, I assumed a rate increase of .1 percent a month for 33 months, or 3.3 percentage points in total. This is very far from being a "worst case." The pa...