In 2020, I decided to go for a 7/1 adjustable rate mortgage (ARM) at 2.125% instead of a 30-year fixed-rate mortgage at 2.75%. I wanted to save on interest, and even though mortgage rates have since shot up due to various global events, I don’t regret my decision. Here’s why:
Firstly, I’m saving money with my ARM. I’m paying less interest than I would have with a fixed-rate mortgage, saving me almost $10,000 a year. Over the seven-year fixed duration, I’ll save around $65,000 in mortgage interest. Even if my mortgage rate increases after my ARM expires, I have a $65,000 buffer before I start paying more.
Secondly, the value of my house has increased since I bought it in 2020. Even with a slight slump since 2022, it’s up by $300,000 to $500,000. This, combined with the money I’m saving on mortgage interest, feels like a win. Even if the house’s value had decreased, I’d still be paying less mortgage interest.
Thirdly, there are limits to how much the interest on an ARM can increase. In my case, my mortgage rate can increase by a maximum of 2% in the eighth year, another 2% in the ninth year, and up to a maximum interest rate of 7.125%.
Fourthly, every month, $3,450 of my mortgage payment goes towards paying down the principal. By the time my 7/1 ARM expires, I’ll have paid off around $330,000 in principal. So even if my mortgage rates are higher in the eighth year, I’ll be paying interest on a lower mortgage balance.
Fifthly, I have the option to refinance before my ARM expires in 2027. The mortgage amount will be much lower than the original, and I might even be able to refinance to another 7/1 ARM that’s under 4.125%.
Sixthly, the fixed-rate duration of an ARM matches my ownership duration more closely. I tend to move every two to ten years, so a 30-year fixed-rate mortgage wouldn’t make sense for me.
Seventhly, even if I end up paying more after my savings buffer is exhausted, it’s not a big deal. Ten years after I took out the 7/1 ARM, my net worth and the price of the property will likely be higher.
Lastly, having an ARM motivates me to pay down debt quicker. If I had a 30-year fixed-rate mortgage, I wouldn’t be as focused on my finances or paying down debt.
In 2023, I took advantage of the weak housing market and upgraded homes. I rented out the home I bought in 2020 instead of selling it. The ARM was the best type of mortgage for me because I knew my home-buying habits.
You may not have the cash or the cash flow to buy a new physical property, but you can invest in private real estate funds and deals. Check out Fundrise and CrowdStreet for opportunities.
If you’re looking to refinance or get a better mortgage rate, shop around online at Credible. They have multiple lenders who will offer personalized prequalified rates and compete for your business.
Remember, everyone’s situation is different. Make sure to consider your own circumstances before making a decision.
