For most people, an adjustable rate mortgage is better than a 30-year fixed-rate mortgage. With an adjustable-rate mortgage, you will likely save more money during the duration of your ownership. Even in a rising interest rate environment, an ARM will likely still save you money in the end because rates will eventually go back down.
I've been taking out an adjustable-rate mortgage since 2005. I will continue to do so because they are more efficient. Over the years, I've saved over $300,000 in mortgage interest expense as a result.
For those of you smartly looking to refinance, do a cash-out refinance, or purchase a new property, I'm here to argue why an adjustable-rate mortgage is better than a 30-year fixed-rate mortgage (FRM).
With ~95% of mortgage holders owning 30-year fixed-rate mortgages, I know I'm part of a small minority. However, if you spend several minutes to read about my logic on why ARMs are better, you might just save more money going forward too.
Why An Adjustable-Rate Mortgage Is Better Than A FRM
The main reason why an adjustable-rate mortgage is better is because it will likely save you money over the long run. I will back this up with logic, examples, and truth.
You know what sells? Fear.
For decades, lenders have used fear to get homeowners or potential homeowners into 30-year fixed-rate mortgages instead of adjustable-rate mortgages.
Lenders like to tell borrowers that if they don't get a 30-year fixed mortgage, they'll potentially face financial hardship when their ARM resets to a higher rate.
By pushing peace of mind, especially to first-time homebuyers, lenders get to earn more money off larger loans with longer durations that charge higher mortgage interest rates.
The thing is, lenders who push 30-year fixed-rate mortgages are either focused on their bottom line, not providing you the entire truth, or are simply ignorant about economics.
Here are the reasons why an adjustable-rate mortgage is better than a fixed-rate mortgage to save you money.
1) The long-term interest rate trend is down.
Interest rates have been coming down since the 1980s as the Federal Reserve has become more efficient in managing economic cycles.
The US has also become the world standard for sovereign assets through the purchase of US Treasury bonds. No country comes close to being as stable and as sovereign as US.
If countries like China would open up their capital account and let its citizens buy foreign assets, we would see a flood of capital head our way. I firmly expect foreigners to continue to buy up U.S. real estate.
Of course, there is no guarantee that interest rates will stay down forever, as we saw in 2022. But in order for interest rates to start a permanent upward trend, a combination of the following would need to occur:
How Mortgages Rates Could Go Up
- The U.S. would have to completely lose its superpower status, causing foreigners to dump Treasuries in lieu of another international safe haven.
- The Fed would have to start printing endless amounts of money to stoke inflation or expectations of greater inflation. Ah hah! This happened in 2020 and 2021 to combat the global pandemic. As a result, inflation rates rose to 40-year highs. However, inflation is rolling over again. And interest rates are starting to go down again in 2024.
- The Fed Governors all turn out to be the dumbest, most inept people on Earth. Ah hah! Actually, if we understand how rich central bankers think, there are as fallible as the rest of us. They care about their legacy and they will sometimes tighten or loosen too much, creating big boom bust cycles. Let’s hope the governors are logical enough not to ruin the world.
- Our government would have to blow up our budget, which is possible if we decide to have medicare for all, free tuition, and wipe out all student loan debt without significantly raising taxes.
- Employment growth would need to be so strong that it causes the natural rate of unemployment to fall to ~2%, which would, in turn, cause inflationary pressure.
- Globalization declines and Nationalism rises.
- The internet regresses and information flow slows
Permanently Higher Interest Rates Is Unlikely
Taking out a 30-year fixed-rate mortgage means you are betting against a 40+-year trend of declining rates and rising economic and intellectual progress. It is not a wise bet.
Yes, the Fed started another rate-hike cycle in 2022. Yes, mortgage rates went up. However, mortgage rates don’t go up forever and tend to revert back to their downward trend. And we're seeing rates decline again in 2024. Further, by the time your ARM adjusts, interest rates will probably revert back to its downward long-term trend.
Take a look at this historical chart below. Notice how the 10-year bond yield, the main determinant of mortgage rates, goes up less than half as much as the Fed Funds Rate.
What's sad is despite the long-term downward trend in mortgage rates, the percentage of mortgages that are adjustable rate mortgages is still in the single digits only. In other words, millions of homeowners have been paying way more in mortgage interest than they needed to for decades. See the chart below.
A general upward sloping of the yield curve.
Due to the time value of money and inflation, the longer you borrow the higher your interest rate.
If you borrow money from me today to pay me back tomorrow, I won't charge you interest. But, if you want to borrow money from me today, to pay back over the next 30 years, I'm going to charge you an interest rate above inflation to counteract inflation, make some money, and bake in some risk of default.
In other words, if you borrow at a 30-year fixed rate, you are borrowing at the most expensive part of the yield curve. When the yield curve inverted, as it was in 2018 and portions of 2020, your best value is to borrow at the deepest point of the inversion.
Take a look at the troughs of the yield curves in 2020. Where I circled is the duration where you should borrow to get the best value. However, basically, any duration between 3-10 years offers great value compared to borrowing at a higher rate with only a 3-month term.
In 2H2022, the yield curve inverted, making an argument a recession is coming or is deepening. As a mortgage borrower, you get better value taking out a 30-year fixed-rate mortgage compared to taking out a one, two, or three-year ARM. However, it is unlikely the yield curve will stay inverted for more than a couple of years, which means there will be better value taking out an ARM again. I’d buy short-term Treasuries when the yield curve is inverted.
The thing is, the average 30-year fixed rate mortgage reached about 6.5% in 2H2022, which is 2% higher than the average 7/1 ARM. Hence, locking in a 6.5% 30-year fixed rate mortgage when mortgage rates are likely going to come down within a couple years is suboptimal.
Match the average length of stay.
Some of you might be thinking that taking out a 5-10/1 ARM is too risky. You plan to live in the property for much longer. If you think you're going to live in your house for much longer than 20 years, the data shows otherwise.
The average duration one lives in and owns a home is about 11 years. Therefore, taking out a 30-year fixed rate mortgage makes little sense. Not only will you be paying a higher interest rate, but you'll also likely sell your home or maybe even pay off your mortgage in under 10 years.
A 19-year overestimation of ownership is a serious miscalculation based on the data at hand. Even if you end up owning your home for longer than a 10/1 ARM, you still have plenty of time to pay down more debt before the interest rate resets, refinance your mortgage, or set aside more money for potentially higher monthly payments.
If you plan to live in your house for 10 years, taking out a 10/1 ARM is the most ideal loan duration. A 10/1 ARM is usually between 0.25% – 0.5% cheaper than a 30-year fixed-rate mortgage.
Here's what I did with some of my mortgages since 2003:
A) Took out a $435,000 mortgage in 2003, refinanced it multiple times to a lower rate, and paid it off in 2015
B) I then took out a $1,220,000 mortgage in 2005, refinanced it multiple times to a lower rate, and paid it off in 2017 by selling the property.
C) I then took out a $568,000 mortgage in 2007, got a free loan modification in 2010, and will pay off the remaining balance by 2023.
D) Took out a $990,000 mortgage in 2014, refinanced it in 2019, and will pay it off in 2027.
Based on my small sample set, I have an average mortgage duration of 13 years. The durations would be shorter if I had not refinanced all the mortgages and/or purchased cheaper homes. San Francisco is expensive!
Adjustable-rate mortgages have an interest rate cap.
I'm not sure whether it's due to misinformation or fear-mongering by your lender or the media, but some people think that once the fixed period of the ARM is over that your interest rate will skyrocket. This just isn't true.
There is a cap on the annual interest rate increase for the first year. Another cap usually for the second year, and a lifetime interest rate cap. Unless your lender is trying to swindle you, there is no endless increase in interest rate increases. Please double check by asking.
For example, I got a 5/1 ARM in 2014 for 2.5%. In 2019, the most it could reset to was 4.5% for one year. The ARM could reset by another 2% in the second year all the way up to a maximum of 7.5%. You can read more about how high an ARM interest rate can reset here.
Don't Forget Principal Gets Paid Down
But after five years, through normal and extra principal pay down, my mortgage was only about $704,000. Therefore, despite the interest rate increase to 4.5% for 1.5 months, my monthly payment hardly changed. After I refinanced my mortgage, my monthly payment went down from about $3,800 to $2,800.
Please know that an ARM doesn't automatically reset higher either. The ARM rate is tied to an index + a margin. The index is usually the London Interbank Offer Rate (LIBOR). If LIBOR is lower during the year of the reset versus the year you took out your ARM, then your interest rate will actually be lower.
In my case, the Fed started raising rates since 2015, so I got caught in the upside since LIBOR follows the Fed Funds rate. However, the Fed cut its Fed Funds rate to 0% – 0.25%. If I took out a 5/1 ARM in 2010 and it reset in 2015, I would have paid the same interest rate for the first year. Good thing most of us with a high loan-to-value (LTV) ratio have the option to refinance when Treasury bond yields are low.
See: The Anatomy Of An Adjustable Rate Mortgage
Heads you win, tails you also win with an ARM.
Let's say you get completely unlucky after your 10/1 ARM expires and your mortgage rate goes up 2%. Further, you can't refinance to a lower mortgage rate because Treasury bond yields are high. This could actually be fantastic news.
Things don't happen in a vacuum. The 10-year Treasury yield is a reflection of inflation and demand expectations. If the 10-year yield, and therefore mortgage rates are rising, that means inflation is elevated or expectations for inflation are also rising.
Inflation increases in a strong economy due to a stronger labor market, rising wages, and higher demand for goods and services. When these things happen, the price of real estate also rises.
So what if inflation rises from 2% to 5%, causing your mortgage to reset from 3% to 6%? If your home is now inflating by 5%, and you have an 80% loan-to-value ratio, your cash on cash return has now gone up by 25%.
Given the cost of ownership is largely fixed, real estate is not only an inflation hedge, but it is also an inflation play. In an extreme circumstance where there is hyperinflation, you need to own real assets such as real estate. Cash will rapidly lose its purchasing power when inflation is high. Real estate is also a hedge against so many bad things in life.
Financial discipline is why an ARM is better than a 30-year fixed-rate mortgage.
When you have 30 years to pay something off, the natural tendency is to pay it no attention. But when you have an adjustable-rate mortgage, you are more aware and more motivated to pay down some debt before the fixed rate period is over.
Think of an ARM like a personal finance trainer. The trainer motivates you to stay on top of your finances and pay extra principal every month. Think of a 30-year fixed mortgage as your neighborhood gym. You hardly ever go, even though you know you should.
Building wealth is much easier when you have a target. An ARM gives you a great timeline target to reduce debt and build equity. The key to paying off debt and achieving financial freedom is discipline. An adjustable-rate mortgage is better than a 30-year fixed-rate mortgage because it will keep your ocused.
Related: A 15-Year Mortgage Is Probably Best For Veteran Homeowners
You're not a helpless infant, you're a Financial Samurai.
Before your adjustable-rate mortgage resets, you can do a number of things:
A) Pay down more principal to lower your future mortgage payments
B) Refinance your mortgage to a lower rate than the reset rate
D) Sell your property
E) Generate income from the property by renting out a room, a floor, or the entire property
F) Generate more income from your job or a side-hustle to pay for higher payments if worse comes to worst
G) Do nothing as the ARM resets to save time and potentially refinance fees
You have plenty of time and plenty of options to make a positive financial move before your ARM resets to a higher rate. If you just pay your mortgage payments as usual and pay no extra principal, you will have paid down roughly 11% of principal after five years.
Therefore, even if there is a rate increase, the monthly payment increase won't be as bad as you think. I have no regrets taking out an ARM in 2020 before mortgage rates started moving higher.
Why An Adjustable-Rate Mortgage Is Better: Peace Of Mind
The more uncertainty and fear there is in the market, usually, the lower mortgage interest rates will go. Investors tend to seek the safety of US Treasury bonds. The lower interest rates go, the higher demand there is for real estate. The higher the demand there is for real estate, the more equity you will build as prices rise.
Don't listen to mortgage officers who push a 30-year fixed mortgage on you for peace of mind purposes. You know why an adjustable-rate mortgage is better. You should actually have less peace of mind knowing that you're paying a higher interest rate than you need to.
Have an ARM that closely matches your duration of homeownership. It should make you feel great knowing that you're paying the lowest interest rate possible to own an asset that provides utility. Over time, your home will likely appreciate as well.
If you really appreciate peace of mind, then quantify it.
Let's say a 30-year fixed loan is currently around 4% vs. 2.625% for a 5/1 arm. Let's say you borrow $1 million. $1 million X 1.375% (difference in the rate) = $13,750 more in interest expense you will have to pay every year for the length of ownership.
If you own the home for seven years, that's $96,250 more in interest expense you would have paid for the comfort of having a 30-year fixed rate mortgage. Assuming interest rates stay the same over a 30-year period and you own the home for 30 years, you will have paid more than $300,000 more in interest than necessary.
In this example, is your peace of mind worth $96,250 – $300,000? Perhaps, but only if you've never read this post. And you can't handle the reality of economics. Or you don't know your options and don't believe in yourself.
After reading this article, I hope you agree why an adjustable-rate mortgage is better than a 30-year fixed-rate mortgage. The next step is to refinance your mortgage and take advantage of all-time low mortgage rates.
Build More Wealth Through Real Estate
Real estate is my favorite way to achieving financial freedom because it is a tangible asset that is less volatile. Real estate also provides utility and generates income. It doesn't lose 20%+ of its value overnight as do some stocks which miss earnings.
Interestingly, real estate is also one of the best performers in a rising interest rate environment. The reason why is because real estate rides the inflation wave and landlords can capture rising rents. For example, rents in the Sunbelt are surging as more people rent instead of buy.
Take a look at my two favorite real estate crowdfunding platforms. Both are free to sign up and explore.
Fundrise: My favorite platform for all investors to diversify into real estate through private eFunds. Fundrise has been around since 2012 and has over $3.5+ billion in assets under management and over 500,000 investors. For most people, investing in a diversified eREIT is the way to go.
CrowdStreet: A way for accredited investors to invest in individual real estate opportunities mostly in 18-hour cities. 18-hour cities are secondary cities with lower valuations and higher rental yields. Demographic trends are positive for 18-hour cities. If you have a lot more capital, you can build you own diversified real estate portfolio.
I've personally invested $954,000 in private real estate so far to diversify my holdings and earn more income passively. Thanks to my investments, I've received over $624,000 in distributions since 2017 and counting.
Why An Adjustable-Rate Mortgage Is Better Than A 30-Year Fixed-Rate Mortgage is a FS original post.
For more nuanced personal finance content, join 60,000+ others and sign up for the free Financial Samurai newsletter. Financial Samurai is one of the largest independently-owned personal finance sites that started in 2009. Everything is written based off firsthand experience.
This article contains references to products and services from one or more of our advertisers. Fundrise is a sponsor of Financial Samurai and Financial Samurai is an investor in Fundrise. When you sign up through links on our site, your information stays private. We may also earn a commission at no additional cost to you. Thanks for your readership and support.
I’m a long-time reader of your site, and of course this was the first place I came when I started to consider an ARM for our next home purchase. I’m looking to shave down the current high interest rate as much as possible.
In today’s rising interest rate environment, it seems a 3/1 ARM wouldn’t be a bad idea. I expect interest rates to go down within 3-5 years, if not sooner.
Thanks for your detailed analysis and explanation of the benefits of the ARM.
Jess
Hi Jess, glad you found value in this post when making a mortgage decision. I think there is an 85% chance mortgage rates will be lower within 12 months.
See: The Most Bullish Economic Indicator Yet
Post-Mortem Analysis of A Bullish Thesis
Hi Sam,
I live in San Jose and have been thinking about ARM after reading your post. I talked to a few banks like Wells Fargo and BofA and they all said that their ARM products are actually more expensive/higher rates than 30 yr fixed. Any pointers on which institutions I should reach out to for better deals?
Evan,
Hi Sam, do you feel this article is still relevant after the last Libor hikes? Would you still advise towards a 10/1 ARM today?
Yes, if you have to get a mortgage. Match duration with likely ownership duration.
Speaking of 10/1 ARM, I got quoted a great rate around 3.5%. See: https://www.financialsamurai.com/well-qualified-borrowers-paying-much-lower-mortgage-rates/
Inflation and rates will fade down by 2023.
Hey Sam, long time reader here, thanks for your excellent posts! As a few others have asked, does your preference for ARMs over 30 year fixed rate mortgages still hold true today? A couple of your qualifiers for an upward trend in interest rates seem to be starting to occur, do you have any new thoughts on this topic?
I think taking out an ARM will still save you money in this rising interest-rate environment. The long-term trends down. Let’s say you take out a 7/1 ARM. In 7 years, There’s a high chance that interest rate trends will revert back to normal, which is downward.
Further, you can always refinance beforehand. And depending on how long you’re on the property, you might sell or leave before the adjustment. Finally, taking out an ARM guarantees you will be paying a lower rate than a 30 year fixed rate mortgage during the fixed duration.
What are your thoughts on ARMs vs 30 year fixed with the rates going up? I refinanced to a 5/6 ARM last year and am wondering now if I would have been better off with a 30 year fixed…
I second this question :)
I like your suggestion to match financing to your average length of stay in a home. First time home buyers tend to stay in their house for even less time than the average home buyer. I’ve recommended first time buyers consider how much square footage and what kind of location they need in the next 5-7 years in order to get the most from their home. Combining an appropriate time horizon for financing using an ARM with a matching time horizon for the type of property could really benefit homeowners!
30 year fixed: 2.875%; no cost
10/6 ARM: 2.49%; no cost
5/6: 2.49%; with a buy down of $635
7/6: 2.49%; with a credit of $305
$450k home @ 5% down
$427.5k mortgage * .385% = $1,645.88 in savings.
I get it’s not $1,645.88 per year (I’m paying off principal).
Why would I do 5/6 or 7/6 ARMs? It seems like 10/6 ARM is the one to go with.
Any advice is greatly appreciated! I don’t expect this townhome to be a forever home for me.
Thanks for this article financial samurai! It’s hard to find articles that are pro ARM (so much fear selling going on for fixed rates).
Is so the 10/6 ARM and lock in 10 years. The extra years is worth something. I still don’t think rates are going up much, even with inflation.
10 year bond yield actually declining now again.
Related post: Income And Net Worth Recommended To Buy A Home At Different Price Points
When I look at rates today, the 30 year fixed is much more competitive than a 5/1, 7/1, or 10/1 ARM… am I missing something? My thought is with the shape of the current yield curve, 7/1 and 10/1 ARMs don’t make much sense for lenders to pursue given the steepness in those sections of the curve.
For reference on a 750k home with 20% down, I’m seeing ~3% on 30yr fixed and 3.875% on 7/1 ARM when I compare rates on Costcofinance.com or bankrate.com. So 30yr fixed clearly the winner…
Any help/guidance would be appreciated!
You’re actually seeing a mortgage market anomaly that needs to be taken advantage of right now with a 30-year fixed or a 15-year fixed rate mortgage.
Usually, the 30-year and 15-year fixed rate mortgage is more expensive. However, banks are getting more bullish (see XLF performance doing great) and are willing to lock in and lend at longer terms.
Hi Sam,
Your posts are very insightful and I always enjoy reading them. Agreed with your points about ARMs and we have always had success with ARMs since 2006. We are refinancing now. Two options: 1.75% for 7/6 ARM, or 2.625% 30-year fixed. With the anticipated rising interest rate, we are debating for the first time whether it’s still a good idea to go with an ARM. Would really appreciate your thoughts.
Information:
Primary residence in SoCal. Expecting to have ~$500k gain in 5-7 years.
We will likely move in 5-7years, considering whether to pay agent commission to sell then and save on capital gain taxes, and invest the profit into something else, or convert it to rental but lose the $500k tax exempt gain.
If we hold the property beyond the ARM period, we will have to refinance again because the ARM terms are 3% margin + SOFR, adjusted every 6 months. The initial reset can go as high as 6.75% (though not likely). Subsequent adjustments are capped at 1% each time. Interest rate during life of the loan is capped at 6.75%.
Related questions we are researching:
Is it truly a great strategy to buy and hold? If so, does it apply to primary residence converted to rental, even if we lose tax exempt on the gain (have to hold it long term to recoup the tax savings).
Or is it better to alway buy primary residence to get more favorable financing, live in it for a few years, then rent it out for 2-3 years, then sell when we can still qualify for the tax exemption? In this strategy, we will likely always have 1 rental, but can’t really accumulate properties.
Thank you so much in advance!!
If others have experience with similar situation, I’d appreciate it if you can share as well. Thank you!
I’m generally in agreement with 80% of what Sam writes but tend take on a little more risk than what he prescribes. However, with regard to my mortgage, I’ve refinanced multiples times with a “safe” 30 year fixed for the last 25 years while Sam has stuck with those “risky” ARMs.
I finally caved on my most recent refi and went with Sam’s thinking…sort of. On my $1M mortgage, given a choice between a 30 year fixed at 3.0% and a 10-yr ARM at 3.0% Interest Only, I went with the second option. I’m increasing my monthly cash flow (which is the point of an ARM) while locking in for 10 years. I’m also strategically maintaining my mortgage balance at $1M over the next 10 years to maximize my interest deduction. I am grandfathered into the $1M limit.
Would you take a mortgage if you had “enough” money? We, family of four, got suddenly “extra” ~$10M. We have always had zero debt but we are also renting. Now we suddenly have about $5M cash and $5M in a single company stock. My one year plan is the following:
1. Buy a ~$2M house for cash
2. Put $5M into SP500 index fund
3. Keep $1M in cash and short term US bonds
4. Keep $1M in the company stock
(yeah that adds up to $9M, but I will need to pay long term capital gains and California income tax on the $4M company stock I will be selling…)
(I also have ~$0.5M in 401k, 90% in stock index funds)
In theory taking a mortgage and putting the money into SP500 would make sense.
Would you buy the house for cash or not?
I’m 47, so is my wife. I make about $300k/year and plan to work at least until I’m 55, although I might change my mind earlier… (My wife is not working)
Frank
I retired in my early 40s back in 2013. My wife continues to work even though she doesn’t need to. If a bank is willing to lend me money for 3% for 30 years (even lower for an ARM) to buy a house (or for any other purpose for that matter), I’m borrowing as much as I can as soon as I can.
If you can’t invest the proceeds and generate an annual return > 3% over 30 years, you’re doing something wrong.
As a point of reference, my house is worth $1.8M, and I just refinanced my $1.06M mortgage at 3%. I would have borrowed more, but I was limited by the reluctance of that bank to lend more than 60%LTV. However, I liked the other terms.
In general, I am highly leveraged because I own a lot of investment property with 65% LTV at rates around 4% on 5 Year ARMs. You’ll never get better financing terms than on your primary residence.
I totally agree with your points about “why an adjustable rate mortgage is better than a 30-year fixed-rate mortgage.” Our most preferred option is the 15 year fixed-rate mortgage though.
According to your chart, it has had the lowest interest rate over the last 18 months or so. It also “helps” people borrow less money overall since the monthly payments are higher (versus a 30 year fixed) and the overall interest paid is significantly less.
Personally, we have paid off 15 year fixed loans multiple times in under 6 years each. Now that we’ve paid off our “forever” home before age 35, we plan to remain debt free from here on out. While taking on significant debt/mortgages can be a great strategy to building wealth, it doesn’t align with our risk adverse and debt adverse personalities.
From here on out we plan to supercharge our already strong savings/investments. We also started a blog to document our journey. It only took about 7+ years of convincing from Sam. Better late than never I guess.
You make quite a few valid points. However, whenever I have shopped the discount for and arm was always negligible over a fixed. Perhaps it was just the timing, but I never felt like the ARM was worth it at all.
I just refinanced my primary mortgage taking it from a 30 year 3.625 to 2.25 at 15 years with no points. The lender covered all closing costs and pre-funded my escrow account for 6 months so the loan was free and I go about 8K in escrow costs. However, I had to bring 186K to closing to pay down my principe to 741K to make the loan conforming, getting it below a Jumbo that banks are not touching. I feel I did great on the loan but that was a ton of cash to come out of pocket. What are your thoughts? Would the cash have been put to better uses in other areas?
2.25% is a great rate for a 15 year. Not only did you pay down more debt, you got a lower rate. Seems like a win-win. I’ve never regretted paying down mortgage debt.
See: No Mortgage, More Courage
In case others are curious about latest rates, WF quote on a new purchase:
25% down, 30 year fixed at 3%
20% down, 10 year ARM at 2.625%
20% down, 7 year ARM at 2.375%
Love the fixed pricing but would be nice to keep an extra 5% in my pocket by selecting an ARM product. Decisions…
Sam’s list of ‘what would have to happen’ for rates to rise certainly reads differently in COVID times. Looks like we are on track to check most of those boxes soon. Possibly I need to cowgirl up on the fixed.
I remember in 1999 when my home loan ARM went from 12% to 24% overnight because of the Asian crisis. Just as I purchased my first home. That really left a scar when we lost the house.
Fixed rate mortgages are amazing and let me sleep, rather than trying to squeeze a few bips extra.
Interesting that these low interest rates have really created a housing bubble in the first world. My latest 2000 square foot home was bought for $160k in 2007, due to weak real estate market and weaker currency it would currently cost around $70k to buy. The developed world has pushed its population out of home ownership or into a crisis if rates were ever to rise a full 1% from 2% to 3%…
Short memories.
Thank you for this very informative article! I looked into 7/1 ARM(3%) vs 30-fixed(3.25%) on a cash-out refinance primary home conforming loan and I went with 7/1 ARM. I’m hoping 7 years give enough time for the real estate market to stable before we have to refinance again. Question now is whether it makes sense to do a planned renovation the house we live in or use that cash to invest in a new investment property :)
I applied to refinance to 15 years (from 30) with 1.55 points leading to a 2.375% int rate and 2.66% APR with a new lender. My current lender now got back to me and wants to offer a 2.5% int rate with 0 points. However, with the COVID situation they have to keep the rate floating until 15 days before closing. Since it is floating, they are offering a 1.25% price protection as well, until it is locked. Very confused on what I should do. Should I stay with the former lender (2.375% with 1.55 points)? TIA!!!
It doesn’t seem right to pay 1.55 points in this market.
2.5% with 0 points sounds good. I don’t see mortgage rates rising.. they’ve since come down since March 18. There are no guarantees, but I’d role the dice and pressure them to give you credit if the rate goes up.
With the new $1 trillion spending plan, should we assume that interest rates will continue to stay flat or even decrease for the next 10 years?
Sorry, to add onto this question, but now, with Democrats $3 trillion spending that was approved by the house and POTUS mentioned he would sign it, the next step would be to get it approved in Congress. I was wondering if your thoughts have changed about getting a fixed rate vs a 30 year ARM now that there is tons of stimulus in the economy. I heard from multiple sources that there is the possibility of inflation in the future. I know it won’t be in the next couple years but I know inflation is possible after that.
No excess inflation. Too much slack in the economy with up to 50 million unemployed by year end.
Great article, I took you advice a got a 10/1 ARM last year at 3.0% . Now rate are going down, would you switch to a no cost 5/1 ARM at 2.875% and if not want percentage would you be comfortable at switching from 10/1 ARM to 5/1 ARM. Thanks Jim
The gap isn’t large enough since you are losing 5 years of duration too.
At 2.5% or lower no cost is when I’d look to refinance for you.
Refinancing is great. I’ve done it many times.
But it’s not free.
First it’s a lot of work if you’re wealthy, lots of docs. Time wasted. particularly if you make high income/hour.
Second: what if you can refi. That you won’t be approved. Banks are not lending, your situation has changed etc…
To me that is the biggest problem with renting or refinancing: that circumstances may not allow it.
I’ve known RE investors to go under exactly because the banks will not lend you an umbrella when it rains.
Now, to me, that’s stressful.
Just FYI the market for mortages is so crazy, my college got a 30 year fixes rate mortage for a primary residence for 1.3% here in good old Germany, Europe…. so yes fixed can be a smart choice. If she would go for 10 years fixed would be below 1%…
Sam,
I have quite a few rentals 20+ houses. I plan on using them or 1031’s into bigger ones possibly. For an investment house that I wont’ “move” out of would it make sense to have a 15 or 30 year fixed?
Thank you!
+1 on this question. Does it make sense to have a rental on an arm versus a 30 year fixed?
Same factors. Depends on how long you play to pay it off / own the rental. Rentals just have higher mortgage rates than primary mortgages.
Interesting perspectives. Currently have a 30y fixed at 3.125%. Haven’t talked to anyone of rates for refi yet but wonder value proposition. 15y fixes wouldn’t work for me due to lower amortization period equaling higher monthly payment. ARM for 10/1 seems reasonable but not sure what the IR would be. I will be doing the numbers but gut tells me that a drop would need to be significant to justify a refi especially if there are costs associated to the process. Curious to get someone’s perspective on my situation. As FYI we make bi-weekly payments for last 5 years so have shorten loan duration already.
Actually rates for 30 year vs 10/1 ARM vs 5/1 ARM are all about the same. Might vary by a couple basis points but right around 3.3%. So I would go with the 30 year fixed in today’s market. I would opt for an ARM if it was meaningfully lower (more than 0.1 point).
If they are for you, unfortunately, your lender is not treating you as a prime customer. I would shop around. It makes me wonder how many other borrowers are getting taken advantage of. This gives me motivation to keep Sharing to help other people.
As of yesterday, I was being quoted 2.75 for 10yr ARM with hsbc. 2.75 for 7yr with Wells Fargo, which can drop 25bps to 2.5% with a funds xfer.