04.01.26 Adjustable Rate Mortgages - A Waning / High Deductible Health Plans

Clark Howard warns against common financial shortcuts in home financing and health insurance that promise upfront savings but carry significant risks, especially adjustable-rate mortgages and high-deductible health plans. He fields listener questions on related topics and shares practical tips amid broader critiques of healthcare costs.

Risks of Adjustable-Rate Mortgages

Mortgage rates starting with 5 or 6 prompt many buyers to opt for adjustable-rate mortgages (ARMs), which offer a lower initial rate—typically one percentage point below fixed-rate loans—for a fixed period of three, five, or seven years, most commonly five. After that, the rate resets based on a contract index, potentially much higher. Howard calls this an "oldie but baddie" booming again as buyers seek affordability.

ARMs suit buyers with substantial down payments and instant equity, like those selling a prior home and applying proceeds to the new one. This low-risk group can refinance if needed without depending on home value appreciation. However, they're dangerous for those financing 95-97% of the purchase price, stretching into unaffordable homes. If values stall, borrowers face reset rates without refinance options, locked into unpredictable payments. Howard advises against using ARMs to afford more house than one can truly handle.