On August 1, 2020, I took a leap and chose a 7/1 adjustable-rate mortgage (ARM) at 2.125%. The alternative was a 30-year fixed-rate mortgage at 2.75%, but I wanted to trim my interest by 0.625%.
Fast forward a few years, and what’s happened? Mortgage rates have soared, influenced by the pandemic, immense stimulus spending, conflict in Ukraine, and various supply chain issues. Inflation hit a staggering 40-year high in June 2022.
So, the question is, do I regret going for an ARM instead of a fixed-rate mortgage?
“No” is the short answer, but let me elaborate on why I’m content with my choice.
Why I’m Okay with an ARM Despite Rising Mortgage Rates
Back in 2020, my family was growing. We’d just welcomed our second child, and our home was a construction zone. I thought it’d take longer to remodel, so I grabbed the chance to move into a better place.
Admittedly, I didn’t foresee the inflation and mortgage rate hike of 2022. But even so, I’ve no regrets about my decision.
1) I’m saving money with an ARM
By paying 2.125% for a 7/1 ARM instead of 2.75% for a 30-year fixed mortgage, I save nearly $10,000 each year in interest. That’s a savings of around $65,000 over seven years! Even if the rates rise, I’ve got a $65,000 buffer before I start losing money.
2) My house’s value has gone up
Despite the economic ups and downs, the house I bought in 2020 has appreciated by $300,000 to $500,000. This combined with the savings on interest feels like a win. Even if the house had lost value, I’d still be content paying less interest.
3) There are limits to ARM interest increases
ARMs come with caps on how much the rate can rise, including annual and lifetime limits. My mortgage rate, for example, can increase by a max of 2% in the eighth and ninth years, and can’t exceed 7.125%.
4) The mortgage principal decreases over time
Each month, $3,450 of my mortgage payment goes to principal reduction. By the time my ARM expires, I’ll have paid off around $330,000. Even if the rates rise, I’ll be paying interest on a lower balance.
5) Refinancing is an option
Before my ARM expires in 2027, I could refinance. Although I won’t likely get the same low rate, there’s a chance for another 7/1 ARM at less than 4.125%.
6) The fixed-rate duration of an ARM matches my ownership duration better
Since I tend to move every few years, the 7/1 ARM fit my investment strategy. I believe in buying, upgrading, living, renting, and moving on, building up a rental portfolio by retirement age.
7) Paying more in the worst case isn’t a disaster
Even if mortgage rates rise after my ARM expires, the principal paydown and savings will give me a substantial cushion. Plus, with ongoing saving and investment, I expect my net worth to be higher.
8) An ARM motivates me to grow wealth
With an ARM’s shorter fixed-rate period, I feel motivated to pay down debt quicker, be more financially focused, and work harder to secure my future.
Final Thoughts
Refinancing or obtaining a mortgage in 2020 or 2021 has been a brilliant financial move, regardless of the ARM or fixed-rate choice. The joy of living inexpensively and watching your property appreciate is unparalleled.
Even with rising mortgage rates, my preference for ARMs remains unaltered. After more than 20 years in real estate, I believe in paying no more on debt than necessary. It’s a philosophy that’s worked for me, and the experience of the last few years has only reinforced my confidence in this approach.
