During my days of purchasing homes with mortgages, I had a fondness for adjustable-rate mortgages (ARMs). The appeal lay in securing a lower interest rate compared to a 30-year fixed-rate mortgage. Further, it’s better to align the fixed-rate duration with my planned homeownership tenure.
With the average duration of homeownership being approximately 12 years, opting for a 30-year mortgage term with a higher interest rate is suboptimal. Getting a 30-year fixed rate mortgage is like buying a bus for a family of four.
Despite my rationale, adjustable-rate mortgages often face strong opposition. Indeed, between 90% to 95% of new or refinanced mortgages fall under the 30-year fixed-rate category. It is logical to be against something you don’t understand or have.
Despite experiencing the largest and swiftest Federal Reserve rate hike cycle in history, there’s no rush to pay off your adjustable-rate mortgage before it resets. Allow me to illustrate using my own ARM as a case study. I’ve taken out or refinanced a dozen ARMs int he past.
No Hurry To Pay Off Your Adjustable Rate Mortgage
Most ARM holders will turn out fine once their introductory rate period is over. Here are the five reasons why:
1) You will pay down mortgage principal during your ARM’s fixed-rate period
Back in 2014, I purchased a fixer-upper in Golden Gate Heights for $1,240,000, putting down 20%. I opted for a 5/1 ARM with a 2.5% rate, resulting in a $992,000 mortgage. Though I could have secured a 30-year fixed-rate mortgage at 3.375%, I chose not to pay a higher interest rate unnecessarily.
Then, on October 4, 2019, I refinanced the remaining $700,711 mortgage to a new 7/1 ARM at a rate of 2.625%. Once again, I had the option to refinance to a 30-year fixed-rate mortgage at 3.5%, but I stuck