Adjustable Rate Mortgages are Not Evil
I pulled the familiar looking envelope out of the mailbox knowing exactly what it was. Would it contain good news, or bad?
Nine years ago this month we moved into our home. It was at the peak of the housing boom, and mortgage lenders used creative financing to put borrowers into as big of a house as possible. We financed our home with an Adjustable Rate Mortgage (ARM) product they called the Builder’s Best Loan. We started at an interest rate of 3.25%, which would remain constant for 5 years. After that, every year on the anniversary of the inception of our loan, it would adjust based upon the interest rates at the time.
When I tell people we have an ARM, the common reaction is that I need to refinance with a fixed rate mortgage pronto, as if my life depended on it. The perception is that ARMs are bad, and that they will cause your interest rate and monthly payment to go up resulting in an unaffordable payment.
That just hasn’t been my experience.
In the four years that our mortgage has adjusted, it has always adjusted down resulting in a lower monthly payment. In fact, my mortgage payment today is less than it was the day we bought our home even though our property taxes are significantly higher.
I did a little investigation to determine what would happen to my mortgage payment if I decided to refinance my home today with a 20 year fixed rate loan (since I have about 20 years left on my current loan). The current interest rate offered by my bank for that term is 3.375% and according to my bank’s refinance calculator I would incur closing costs of about $5000, and have a monthly payment of about $100 higher.
I would pay close to $5000, for the opportunity to pay $100 more in interest each and every month. Why would I want to do that?
I opened the envelope and read the letter, but I already knew what it was going to say. I had researched how my interest rate is calculated a few weeks earlier, and knew my interest rate was staying exactly the same for the next twelve months.
I will continue to watch interest rates, and if the time comes where it makes sense to refinance my home I will. But until then, I’ll keep my 2.875% interest rate thank you very much!
What are your thoughts on ARMs? Do you have one? How is it working for you?
Brought to you courtesy of Brock
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Brock is a software engineer by day and personal finance blogger at night. He is a fitness junkie and enjoys grilling and smoking meat. Married with two children, Brock strives to improve his skills as a husband and father, and is always on the lookout to stretch his family’s budget as far as he can.