Given the recent surge in inflation and mortgage rates since August 2020, some may question the wisdom of opting for an adjustable-rate mortgage (ARM) back then. However, the decision may not have been as bad as it seems. Let’s delve into the rationale behind this perspective.
Running Financial Samurai has allowed me to engage with readers who challenge my financial viewpoints, which I appreciate as a valuable learning opportunity. Constructive criticism helps us grow and avoid being trapped in an echo chamber that stifles improvement. Following the recent spikes in inflation and mortgage rates, some have criticized my continued support for ARMs. Hindsight often makes it easier to point out perceived errors.
I have advocated for ARMs over 30-year fixed-rate mortgages since 2009, even when the 10-year bond yield was around 4%. This belief predates my Financial Samurai venture by five years. While the 10-year bond yield has fluctuated, my recommendation to opt for an ARM to save on mortgage interest has proven accurate for over a decade. Admittedly, the rise in mortgage rates in 2022 challenged this stance, but subsequent rate decreases have mitigated the impact.
Critics argue against ARMs, citing the availability of historically low fixed rates. However, the potential savings with an ARM, especially in the current interest rate environment, should not be dismissed. ARMs offer initial fixed-rate terms followed by adjustable rates, often with interest rate caps to limit fluctuations. Analyzing the long-term implications, ARMs can still be advantageous, particularly in a rising real estate market.
In a high inflationary environment, property values tend to appreciate, offsetting concerns about mortgage rate fluctuations. The debate between ARMs and fixed-rate mortgages pales in comparison to the potential gains from real estate investments during inflationary periods. Property values often outpace mortgage interest savings, emphasizing the importance of strategic real estate investments.
Ultimately, the decision between a fixed-rate mortgage and an ARM hinges on individual circumstances and financial goals. Conducting thorough mortgage analyses under various scenarios is crucial to making an informed choice aligned with your homeownership plans. Matching the mortgage term to your anticipated homeownership duration can optimize financial outcomes and provide peace of mind.
While my personal choice of a 7/1 ARM in 2020 reflects my confidence in future interest rate trends, each homeowner’s situation is unique. Whether opting for a fixed-rate mortgage or an ARM, the key is to align your mortgage strategy with your financial objectives and risk tolerance. By making informed decisions tailored to your circumstances, you can navigate the complex landscape of mortgage options and real estate investments effectively.
