Today I’ll outline my experience with three different types of loans:
Each of these loans met various needs and criteria that we had during the time of each of our transactions so I will walk you through our thought process and what items to consider. Let’s go!
Adjustable-Rate Mortgage (ARM)
Adjustable-rate mortgages (ARM’s) are mortgages that offer a fixed interest rate for a specified period of time (typically, 5, 7 or 10 years) and then adjust periodically (such as yearly) for the duration of the loan. Interest rates can increase or decrease based on a benchmark interest rate index that is chosen by the lender. The full term of an ARM is usually 15 or 30 years.
There are several ways these loans are structured, which are expressed by the duration of the fixed and variable time frames. A 5/1 ARM, for example, has a fixed interest rate for 5 years and a variable rate that resets every year thereafter for the duration of the loan.
ARM’s typically, but not always, have lower interest rates for the fixed portion of the loan in comparison to traditional 15 and 30-year fixed-rate mortgages. Therefore, if you do not plan to live in your home longer than the duration of the fixed interest rate, an ARM is an ideal option that can save you money in paid interest.
When we bought our first condo, we knew we would eventually want to upgrade to a single-family home in the future, so we opted for a 10/1 ARM with a 30-year term. At the time, this loan offered a notably lower interest rate in comparison to a traditional 30-year fixed-rate loan. Even though we had the option to choose a 5/1 or 7/1 ARM at an even lower interest rate, we felt a 10/1 ARM gave us an added buffer in case our circumstances changed.
When we did make the move to a single-family home a few years later, interest rates between a 10/1 ARM and a 30-year fixed rate were almost equivalent. Although we were not certain that we would stay in our new home long-term either, a traditional 30-year loan provided additional security without sacrificing a significantly higher cost in interest.
When evaluating an ARM, you’ll want to consider the following:
With more companies moving towards remote work, plenty of geo-arbitrage opportunities to relocate to lower cost of living areas, and increased connectivity, finding a forever home is not always the end goal anymore. The average home buyer now lives in their home for 8 years.
ARM’s have the potential to provide significant savings in comparison to their fixed-rate counterparts for shorter-term residencies.