Most people think a 30-year fixed-rate mortgage is the safest bet, but I’m here to tell you that an adjustable-rate mortgage (ARM) might be a better choice. Why? Because it could save you a ton of money in the long run. Even if interest rates rise, they’ll eventually fall again, and you’ll still end up saving money. I’ve been using ARMs since 2005 and have saved over $300,000 in mortgage interest.
Now, I know most people prefer the 30-year fixed-rate mortgage. But if you take a few minutes to understand why ARMs can be better, you might end up saving a lot of money too.
Here’s the thing: lenders have been scaring homeowners into choosing 30-year fixed-rate mortgages for years. They say that if you don’t lock in your rate for 30 years, you’ll face financial hardship when your ARM resets to a higher rate. But this is just a tactic to make more money off larger loans with longer durations and higher interest rates.
The truth is, long-term interest rates have been on a downward trend since the 1980s. The US has become the world standard for stable assets, and if countries like China allowed their citizens to buy foreign assets, we’d see a flood of capital coming our way.
Sure, there’s no guarantee that interest rates will stay down forever. But for them to start a permanent upward trend, a lot of things would need to happen, like the US losing its superpower status, the Fed printing endless amounts of money, or our government blowing up our budget.
So, taking out a 30-year fixed-rate mortgage means you’re betting against a 40+-year trend of declining rates and rising economic and intellectual progress. Not a wise bet, if you ask me.
Now, let’s talk about the yield curve. The longer you borrow money, the higher your interest rate. So, if you borrow at a 30-year fixed rate, you’re borrowing at the most expensive part of the yield curve.
Also, consider this: the average duration one lives in and owns a home is about 11 years. So, taking out a 30-year fixed rate mortgage doesn’t make much sense. You’ll likely sell your home or maybe even pay off your mortgage in under 10 years.
And don’t worry about your ARM’s interest rate skyrocketing once the fixed period is over. There’s a cap on the annual interest rate increase, so there’s no endless increase in interest rate increases.
Another thing to remember is that an ARM doesn’t automatically reset higher. The ARM rate is tied to an index + a margin. If the index is lower during the year of the reset versus the year you took out your ARM, then your interest rate will actually be lower.
And even if your mortgage rate goes up after your ARM expires, it could actually be good news. If mortgage rates are rising, that means inflation is elevated or expectations for inflation are also rising. And when these things happen, the price of real estate also rises.
Finally, an ARM can help you stay on top of your finances and motivate you to pay down some debt before the fixed rate period is over. It’s like having a personal finance trainer.
Before your ARM resets, you have plenty of options. You can pay down more principal, refinance your mortgage, sell your property, generate income from the property, or generate more income from your job or a side-hustle.
So, don’t let mortgage officers scare you into a 30-year fixed mortgage. An ARM that closely matches your duration of homeownership can save you money and give you peace of mind.
And if you’re worried about inflation, remember that real estate is a great hedge against inflation. As inflation rises, so does the value of your property.
So, there you have it. That’s why I believe an adjustable-rate mortgage is better than a 30-year fixed-rate mortgage. And if you’re looking to build wealth, consider investing in real estate. It’s a tangible asset that’s less volatile and provides a steady income.
