What’s the longest time-period you’ve ever lived in a home? Consider Jane and John Doe who are buying a new house with a $200,000 mortgage. In this example:
- Expected ownership period is 7 years
- Interest rate / APR on a 30-year fixed rate loan is 4.5%
- Interest rate / APR on a 7-year adjustable rate mortgage (ARM) is 4%, and the rate is fixed for the first seven years
- Assume the worst-case scenario, and the interest rate / APR on the 7-year ARM goes up to the maximum possible rate of 9% in year 8
As you can see from the chart, with the fixed rate loan, Jane and John are losing money now in exchange for MAYBE saving money later IF interest rates go up significantly AND if they keep the home for more than 8 years without refinancing. On the other hand, with the 7-year ARM, Jane and John are saving money now in exchange for MAYBE losing money later IF interest rates go up significantly AND if they keep the home for more than 8 years without refinancing. Which bet would you rather make?
PLEASE NOTE: This article is provided for illustrative purposes only. It is not an offer or commitment to lend you money, and it is not an advertisement for a specific mortgage or a specific interest rate. Payment examples don’t include property taxes and home insurance. Contact me to run the numbers for your situation.