Adjustable rate mortgage!
As you may know, I recently purchased a house that was too expensive and too big. Financial mistake- likely. Human nature- definitely. Enjoyable view- for sure. I decided on a 7-year adjustable rate mortgage versus a traditional fixed 30 year loan. Interest rates were low (this is pre-Trump winning the election). When I told family and friends they looked at me like I had a horn growing out of my head. So what were my reasons for going with an arm.
My personal lifestyle
In the last 7 years I have lived in Boston, Nashville, Buenos Aires, New Orleans, and now Northern California. It does not bode well that I will be in the same spot in 7 years. Now, for the record, I do plan on being at this job and home for at least 10 years and likely longer, but I cannot predict what opportunities will come and move me. Heck we may be living in an RV by then like Millennial Money Man. That is my dream…to live in an RV and travel the country. I am still trying to get my wife on board. She is pro-RV but I think would also like a home base.
Mortgage payment plans
While interest rates may go up, I hope to have a chunk of cash available to pay down principal if needed at the time of refinance. Heck, I may pay it down even if I don’t have to. The goal would be to have 50% of the mortgage paid down by 7 years.
I have always planned on refinancing at a 15-year term (after the initial 7 year arm) making the life of the loan (if paid as scheduled) 22 years. This sounds way better then 30 years and will allow me to have my home paid off by my absolute latest retirement date of 24 years (sounds brutal when I write it down).
I locked in a rate of 2.875% for the 7-year arm. The 30-year fixed was at 3.625%! This was surprisingly higher and when you look at monthly payments there was a $213 difference of payment going to principal (higher with the 7-year arm). The 7-year arm payment was also $411 cheaper per month. So if you take the $213 to principal and the $412 savings per month, that is a positive $625 in cash flow. That is a total of $52,500 saved over the seven years. That is some legitimate money. I could take that money and 1) pay off my student loans, 2) place it towards the principal on the home loan further decreasing my loan amount at refinance time, 3) buy the RV I dream of like Millennial Money Man (though I think an Airstream costs a bit more).
So I guess the key going forward when buying a home is to look at all of your options. An arm allows for lower interest rates because the bank is not expecting you to pay off your loan quickly. Then when it is time to refinance you have to pay the loan fees and also end up with a different interest rate (honestly probably higher then the historical lows we had been having). So if you decide to take an arm like we did, do it with the intent of paying down the principal with the extra cash. I should be putting an additional $4800 towards my loan each year.
So what do you think, is an Arm the right choice for you?