5 Reasons Why a 5 Year ARM Made Sense
Last spring, my family and I made the commitment to purchase a home. Our new mortgage is a Adjustable Rate Mortgage that is scheduled to adjust in about five years. In my first post about this topic, many readers questioned the wisdom of getting a 5/1 ARM. The point that the readers made was solid: interest rates are at the lowest in years and likely the lowest that they will ever be, therefore, it follows that we should have locked in a 15 or 30 year rate. I understand the wisdom of that line of reasoning, yet we still chose to go with the 5/1 ARM.
Five reasons why we opted for an adjustable rate instead of long-term mortgage:
We need to save money now.
The primary motivator in moving away from our rental and purchasing a home was to save money every month on housing costs. We needed to reduce our monthly budget up front and the lower payment due to the ARM allowed us to qualify for the lowest interest rate possible. It is true that our payment will increase in five years, but we are fairly confident that we will be able to handle the adjustment at that time.
We want to pay down our balance.
A lower interest rate and a lower monthly payment means that it will be easier for us to pay down principle when we have extra money. From time to time, we will be able to send more money than is required by our minimum payment and at the end of five years, we hope to have a much lower balance with which to seek refinancing.
Our focus is on PMI.
Any of you who have taken a mortgage or refinance in recent years know that private mortgage insurance rates (or PMI) have gone through the roof. Our current PMI charge is more than $100 a month! When we get to 20% equity, the PMI charge drops off our loan, our goal is to make that happen as soon as possible by paying down principle. We will certainly qualify to remove PMI in five years meaning that even when the rate adjusts, our monthly payment will go down.
We will most likely move out before 5 years is up.
We have talked about two options for this property: sell or rent. We hope to move to a different home ( in this area) within five years. If we do not sell this place, it is highly likely that we will be able to move out and then offer this property as a rental. At minimum, we will have a higher mortgage payment, but we will be able to roll that added expense into our rental rates. The most likely scenario is that we will have to refinance anyway in order to get a mortgage suitable for rental properties.
The maximum rate is not too bad.
All of the other factors are mitigated by this provision in our loan: our rate can only go up a maximum of 2% over the life of the loan. So, relative to historic interest levels, we have locked in a pretty good rate.
I understand that many of you probably do not consider these reasons to be compelling and would have still opted to lock in a 15 or 30-year rate. We have taken a calculated risk based on our current v future cash flow and chosen savings in the short-term.