The One Rule You Must Follow if You're Signing an Adjustable-Rate Mortgage Today

One of the most frustrating things about the real estate market today is that not only are homes expensive to buy, but mortgages have become expensive to sign. As of this writing, the average mortgage rate on a 30-year loan is 7.02%, per Freddie Mac. For a $250,000 mortgage, that has you paying $1,667 per month for principal and interest.

As such, you may be eager to do what you can to reap some initial savings on your mortgage. And signing an adjustable-rate mortgage, or ARM, could be a good way to do that.

As the name suggests, an ARM doesn't offer the benefit of a fixed interest rate on your home loan. Rather, you start out with a certain rate that can then adjust over time with market conditions -- either upward or downward.

The benefit of an ARM is that you'll often be able to snag a lower interest rate initially than you'd get with a fixed-rate mortgage. And given how costly it is to borrow today, an ARM could make a lot of sense if it results in some initial savings on your monthly housing costs. But if you're going to get an ARM, it's important to follow one key rule.

Make sure you can actually afford your mortgage as-is

A big reason mortgage rates are so high today is that borrowing costs are up in general following a series of Federal Reserve interest rate hikes. But in time, the Fed is expected to start cutting interest rates. And once that happens, mortgage rates should follow suit, at least to some degree.

This doesn't mean we're going to be looking at the record-low mortgage rates borrowers were getting back in 2020 or 2021. But will the average 30-year mortgage rate be lower than 7.02% come this time next year? There's a good chance it will be.

As such, getting an ARM could make a lot of sense right now because you could pay a little less each month on your mortgage initially and then see your rate -- and monthly payments -- fall over time. But if you're going to get an ARM, you must make sure you can afford your mortgage payments based on your initial rate -- rather than bank on your rate going down.

As a general rule, your housing costs, including your mortgage payments, property taxes, and insurance, should not exceed 30% of your take-home pay. So if, based on your current mortgage payments with an ARM, you're within that limit, you should feel fairly confident about being able to afford your housing expenses.

But what you don't want to do is sign an ARM whose payments have you spending 40% of your income on housing at present. You may be convinced that mortgage rates are only going to fall from where they are today, and that may be a reasonable assumption. But still, you never know. And you don't know how long it will take for mortgage rates to drop. So you have to make sure you're signing up for payments you can afford now.

Shop around either way

Some people will tell you that an ARM is risky because while rates might fall in the coming years, they could very well rise again in the course of paying off your home. At that point, however, refinancing your mortgage could be an option, so an ARM you can afford is not necessarily a poor choice.

But if you're going to get an ARM, shop around with different lenders. You never know which one will have the best offer for you until you put in an application. And since your goal in getting an ARM is probably to save money, you might as well do what you can to enjoy the maximum amount of savings possible.