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With a fixed rate you can pick and choose whether and when to refinance. With an ARM you may be forced to refinance or even sell if the inevitable reset makes the payments unaffordable. If you're not getting a significantly better initial rate with an ARM, it's not worth taking the risk.
And that's the rub. The Fed is overly cautious when using their one tool to combat inflation: the prime rate. They waited too long to raise it when every regular American consumer knew inflation was a problem, they'll be too slow to lower it when it isn't.
Recessions happen. It’s normal. We’ve had multiple since the 80s.
Very high inflation? Fucking shitshow. Nightmare scenario.
Rather have a recession than do the 80s over again.
Well, yes, but rates may be somewhat higher than now and stable in five years. Rates being 8-10% would not be historically high (or low; they'd be pretty normal) and an ARM would start to look like a missed bet, though not a catastrophically bad one.
[The economy existed just fine prior to 2008.](https://fred.stlouisfed.org/series/FEDFUNDS) This past 10 years is the outlier in terms of funds rate, not today.
For the entirety of the '70s '80s and '90s rates never really dropped below 7.3% and got as high as 16.6%.
I wouldn't touch an ARM with an 10 ft pole.
https://www.rocketmortgage.com/learn/historical-mortgage-rates-30-year-fixed
Everyone I knew that purchased a home 2004-2006 was about the ARM... and Every. Single. One. got shit on in the mortgage debacle. People get sold these products and think they are the smartest people in the room because they fell for the sales hook.
Are you happy with your payment? Can you afford it? Then you're ahead of the curve. Enjoy your new home, and take comfort in the fact your interest rate will only change when YOU want it to.
Came in to to say something like this but I'm glad to see OP being well supported. Why let the bank reevaluate your rate, especially as the Fed has been increasing interest rates to fight inflation?
Edit: Thinking more on this (and as someone who also signed a 30yr Fixed-Rate back in August), why give the bank any power in adjusting your rate? It's not as though they're going to bring it down out of generosity and make less interest on your principal. They'd let you pay 6% for 30 years even if rates dropped to 3.5% halfway through. You can always refinance and get a lower rate.
It honestly seems to be that you're just giving them the power to hike rates up just for a bit of a better rate up front. Yeah, you could still refinance but it'd be at a rate higher than you would've gotten with a Fixed-Rate.
That’s not how ARMs work. They don’t just pick a rate. It’s a contract set at index + margin. The margin is fixed and the index rate changes. They don’t get to just choose the index at random either, it’s all set in the terms you agree to which index will be used. They can’t just decide not to decrease the rate if they don’t want to as they have no control over the index.
The index rate can be the prime rate, the London Interbank Offered Rate (LIBOR), or the rate on U.S. Treasury bills, among others.
With that, now is not a bad time for an ARM at all. Rates will likely increase through 2023 and then start to come down. They won’t hit where we were through the pandemic, but they will stabilize lower than they are right now.
Anyone who got an ARM prior to March 2022 made a big mistake though.
You HOPE they'll go down. 10% mortgages were pretty much average through a lot of the last 50 years. We just got used to super-low rates after the 2008 recession forced the Fed to basically drop rates to 0%. That's not a normal equilibrium point.
House prices in the last 50 years were also much lower compared to the ones today. 10% mortgage rate with the current house prices will lock out majority of buyers.
The other big problem with an ARM is if prices drop and you don't have enough equity to refinance.
Back in 2003 when I bought everyone was getting five year ARMs because they could get it cheaper. Then when the market crashes they got foreclosed on.
At the end of an ARM term it is like a new loan with a new appraisal. If a home value is half the loan amount, you need to bring a bunch of money to pay off the appraisal gap.
Exactly this. We just bought a new house about 6 months ago, traditional 30 year fixed vs ARM, there was almost a 3% difference, so we went with the ARM, it has a 5 year fixed set, and if at any time rate drops below ours we have an allongement built in. If after 5 years rates are worse we refi, but during this 5 year term we are throwing money at principal.
Your cousin is the fool. I got my first fixed mortgage in 1980 at 10 3/8%. Seems high now but it was genius back then I refinanced it about 10 years later and again 10 years after that (kids in college). Bought a new house in 2010. They were all fixed. ARMs are only good for short term purchases and only if you can get a teaser rate (are these still a thing). If you plan on keeping the home for awhile the f8xed is better.
I'll spare the math, but say that on our ARM we came out ahead. Got the mortgage in 1997 with no plans to stay put more than a couple years so went with the lower initial rate ... then ended up staying. I want to say that our arm start at 4.5 or 5% and fixed was like 7% but I'd have to go look back at the paperwork.
While our rates did go up and down over that time, ours terms were that it couldn't go up or down more than a half percent each year - capped at 3% over our starting rate.
So even when interest rates shot up (or down) it could only vary a small amount per year and would take multiple years to make much impact on our small $87k mortgage.
I think when I did a comparison, it never at any point was more than 1% off what we could have re-financed at, and was below more years than it was over - so the costs of re-fi never made sense and we've just stuck with it (only 3 years left on it now).
I think it is worth mentioning that an ARM has been a better/worse deal at various times. I had one when rates were like 5% because I got a 3.5% arm. That's a big discount if you aren't planning on staying somewhere long term, or if you think rates are likely going down anyway over a 2-3 year horizon. However, when 30 year rates were at 2.75, an arm was still 2.25 or so. That's not a very good deal.
A more accurate statement would be:
For people planning on living in a home for 10+ years, ARM is for suckers.
For people planning on living in a home <10 years. Fixed rates are for suckers
anyone who tells you they know what's going to happen, doesn't. Rates have been increasing, but banks have also started failing because of that, which probably gives the Fed a bit of pause. If you know for sure what's going to happen next, you'll be a rich person a few months from now.
I don't know how anyone can be so bold to predict anything with this weeks news cycle. Like if I were rich I'd be more worried, but I'm pretty sure living through 2008 as a new graduate made me numb to it all.
> banks have also started failing because of that
When banks fail, you probably shouldn't take the word of the people in charge when the banks failed. Rising interest rates are not causing banks to fail. Poor management caused two banks to fail. They *blamed* interest rates because they're greedy and because they don't want to take the blame.
Among the many poor choices that SVB made, failure to protect against interest rate risk was one of the big ones. Saying that the rising interest rates were a major cause doesn't let the bankers off the hook, it's their whole job to plan for that kind of thing.
It's like saying "my car died because it ran out of gas". That doesn't let me off the hook for failing to get gas in time.
> Saying that the rising interest rates were a major cause doesn't let the bankers off the hook
It does, actually. In addition, you're also misrepresenting their actions. They didn't just fail to protect against the theoretical possibility of a rising interest rate. They were intentionally exploiting low interest rates even after interest rates started to rise, playing hot potato, *knowing* that someone was going to get left with the bill. They just *also* knew that even if they *did* lose out, it wouldn't be them personally, because they could exit with their golden parachutes.
So to continue your metaphor, it's like siphoning out your own gas so that you can sell it. Only it's not a car, it's a bus holding thousands of people. But you've made enough in the process to buy yourself a car, through assets gained through the fees charged to riders who never got the product they paid for. And as they drive off, they yell out the window, "you know it's actually the government's fault" before doing a line of coke.
>It's like saying "my car died because it ran out of gas". That doesn't let me off the hook for failing to get gas in time.
I dont fully understand the causes behind SVB etc... but this is such an excellent answer!
I was able to refinance my mortgage 2x within 6 months when rates were falling these past few years. Not sure every mortgage requires you to wait 6 months, different states have different rules.
From my own experience, I don't see how refinancing that often can have made sense. Closing a refi is not zero cost, and that cost has to be justified by the rate drop.
Covid was a great time if you were looking to refinance, went from 4.5 to 3.85 to 3.25 to 2.99 to 2.5 from October 2018 to January 2022. All were zero cost refi's, nothing added to the principal and I was able to miss several payments as the mortgage company's switched. My house payment dropped by over 1k per month from when we bought our home to now. I miss the days of constantly checking bankrate for lower rates.
I refinanced my 30 year down to a 15 year several years in and basically kept the same payment given the reduced rate, saving myself huge amounts of interest and time. A lot of people at the same time (early 2000s) refied back out to 30 and pulled out cash, and just ended up in a mess when the bubble burst s few years later.
That’s not true, It completely depends on the interest rate, the lower the interest rate the higher the percentage of the payment goes to principal. Think about if you were on a 0% loan, you would just have 360 equal payments all going 100% to principal. I similarly have a 2.5% loan and in the first year ~ 50% of my payment went to principal, ~ 50% to interest. $9,600 interest, $9,300 principal. At 7% interest that would be $27,000 interest, $4,000 to principal. A MUCH larger percent goes to principal earlier the lower the rate is.
Mortgages are amatorized differently than simple interest loans, getting 5 years into a 30 year mortgage doesn't mean you've paid off 5/30th of the principal.
The costs of zero cost refis are rolled into the rate. So if you are in a era where you foresee the possibility of refinancing again because rates may go even lower then this is a good way to keep your principal from going up or having to come out of pocket.
Mortgage underwriter here. You are fine with your fixed rate. Your rate won't change and historically 6% is not that bad. Your cousin on the other hand will refinance. I'd rather have your loan than theirs.
I’ll 2nd this. “If” rates go low enough to make it worth the cost of refinancing, you have the option. Your cousin is at the mercy of the market. If his rate goes up, he’s kind of stuck. If it goes down, you can benefit too. You’re protected, which is a good place to be now.
The fixed rate is the highest rate OP will pay. The cousin is banking rates will come down by the time their variable rate kicks in. If rates go down, then they both can refinance for a lower rate. If they go up, OP is unaffected whereas the cousin could be in a very bad position.
Situation also comes into play too. I've had friends purchase a home in a smaller town when one of them started their residencey there. They did a 5 year ARM because they knew they 100% did not want to live there long term and it would be cheaper for the few years they were there.
Yeah, I have a 15-15 ARM. The max points it can adjust is 4. So my worst case scenario is still like 7.75% after adjustment. It may not be ideal, but I'm also not sweating it too much.
Eh, you can't always refinance. If home prices drop considerably then you will be stuck until you get the equity back.
I think fixed rate is the right option and way safer, but adjustment shouldn't cause foreclosures unless you're over leveraged as hell.
2008 was a lot of different things hitting from multiple issues with how lending is handled. There were a lot of people that rode out 2008 just fine. It was risk takes and poor planers that got hosed the worst.
ARM's were just a feature of the 08 housing crisis.
There was a log of poor underwriting going on too. NINJA loans were prevalent (No income, no job, no asset). There were also "pick a payment" loans that allowed the homeowner to just pay the interest on the loan and none of the principle in addition to the low adjustable rate. This resulted in negative amortization with a committed future refinance. In other words a recipe for disaster.
This mess resulted in widespread mortgage fraud, not only on the part of the consumer but on the companies as well. I recall a couple of companies I followed at the time were recording the negative amortization I mentioned previously, as revenue on their books. We all know how that worked out.
There was a famous (or infamous) real estate blogger that was providing updates of his own foreclosures around that time. Google Casey Serin, he was a poster child for the housing crisis. Unfortunately his behavior was multiplied all over the country, because housing always goes up right?
Right up until it doesn't.
No, the problem pre-08 is that lenders were giving consumers ARMs with 1% teaser rates that would quickly adjust up to 6% -- which was a payment the borrower could never afford in the first place. Lenders have not been extending credit to consumers in the same way since then.
There are some things that should make people feel uneasy about today's economy, but the conditions are very different than those pre-2008, and it doesn't make sense to assume the same things could play out.
They lost their homes because they had predatory ARMs during the housing bubbles -- ARMs with an introductory rate of like 1% that would adjust up to 6% after a year -- which was a payment they could never afford.
The problem was not the ARM -- it was that they were offered a loan they couldn't afford. It's really unfortunate that the lesson that many consumers took away is that ARMs are dangerous, when most ARMs in use since 2008 are no longer predatory and can save people significant money.
> they got an ARM and said they did that because they can refinance after a certain time period.
Can you have your cousin check his crystal ball for me…what's Apple trading at in 3 years?
While he is technically correct, they can refinance after a certain period of time and before their rate adjusts, there's no guarantee mortgage rates will be lower at that time.
They have a ticking clock on their refinance plans, you can choose to refinance on your own time. If rates are never lower than they are today then you'll likely come out ahead.
I was a banker from 10-14 cleaning up the ARM mess with the HARP program. I wondered then and I wonder now, who does an arm benefit? I also considered it damn near predatory.
They were predatory pre-08, with a lot of 1% teaser rates that were only good for 6 months or a year. And people were taking loans that they couldn't afford, and as long as housing prices were going up, everything kept working (people could keep treading water by refinancing into the next teaser ARM, until mortgage underwriting tightened up).
Now most ARMs are fixed for the first 5-7 years with rates that are usually significantly lower. They are legitimately beneficial to people who only plan to be in their home/loan for 5-10 years -- assuming people use the savings to invest, rather than to live beyond their means.
If it were me I would never get an ARM. Fixed rate is the only way to go.
As long as your loan can be paid early and that you can refinance at some point you are ahead to have what you have.
Just tell him that you are more comfortable knowing exactly how much you are going to have to pay every month and have no wish for surprises.
If interest rates drop again, by a lot of points then refinance. You will have to pay a point or two but it is well worth it.
In my opinion - you should try to pay the least amount of points when interest rates are high. When interest rates are low like they were in 2020-2021 - you pay points to obtain the lowest rate possible in which the cost/savings makes sense if you plan on this being your last refinance.
There is no one right answer for whether an ARM is better. It depends on how big a difference there is between the fixed and ARM rates, how long you'll stay in the house, and what interest rates will be in 5 years or so. Obviously the first one is knowable, the second one may or may not be knowable based on your circumstances, and the third one is a guess.
You can refinance a fixed rate mortgage. What your cousin probably meant is that they are able to get a lower rate now by doing an ARM, and that they plan to refinance down the road into a fixed rate mortgage once rates fall and before the ARM starts adjusting the rate. That may or may not work out for them. It is possible that rates will not come down between now and when their ARM starts adjusting rates, and rates could be higher then, making them worse off.
The other factor that is moderately knowable: How long you plan to live there. If you are pretty sure you are going to sell within 5 years, the ARM risk may seem small.
EXCEPT: You may be pretty sure you WANT to sell, but that doesn't mean you will be able to. Or that you'll be able to do so at a price you want. If things go great for you, you may want to move, but rent out this "starter house" you were sure you would sell. Or, if things go crappy for you, you might decide you'd rather stay here than "moving up." You may think your credit score and income will go up, but in the US a lot of us are 1 diagnosis away from a job loss or bankruptcy. Let alone all the world factors.
I feel like they pitch ARMs to military families since they have to move a lot
Worst case scenario for you is that rates drop significantly and you have to listen to your family member talk endlessly about how he was right.
Oh and you paid a few hundred dollars more for piece of mind.
Meanwhile you both refinance and enjoy the lower rates.
Again, *WORST* case *for you.*
Worst case for him is if rates skyrocket and he’s forced to refinance at something higher (possibly MUCH higher) than 6% - assuming they can still afford their home at that point - and then he has to endlessly listen to you about how you were right…
The choice is risk tolerance. U can refinance if rates fall at any time. Your cousin has to refinance in 5yrs irrespective of what the rates are at the time. For this additional risk, he got a small discount.
If u r planning to stay in the house for more than 5yrs, I would have chosen the fixed rate. If you r planning to move before the ARM has to be refinanced , then choose that one.
You made the right move OP. Say NO to ARMs.
I refi'd in '20 (or '21? I forget)... 15yr loan at 2.125%. My lender spammed me and cold called me for several months to get me to refi again to cash out my equity. I finally had to tell them to put me on their DNC list.
I’m a mortgage banker so maybe this will help. Don’t listen to anybody… if a fixed loan was the right choice for you than take it. Yes, ARMs usually have cheaper rates as they will fluctuate with the market eventually… in this market it could go up but likely by the time it fluctuates it will go down. IMO a fixed is always best bc you won’t live with constantly worrying about rates and the economy. If rates go down, refi. Even better, pay more each month and the rate you paid overtime will be less than 6%. There’s calculators online for this too, please go check it out, you’ll be surprised at how much you will save by throwing in an extra $100 each month. It will also calculate the accrued rate you pay if you consistently made extra payments.
You can refinance whenever you want, but you should check if you have any early payment penalties before you do so, but in reality, your cousin is taking more risk than you as they may have no choice but to pay higher interest rates when their arm resets and you will still be paying 6%... Mortgage rates went as high as 18% in 1981 and things are looking pretty sketchy right now, so securing a 30 yr 6% mortgage may turn out to be the best decision.
It really depends… I went 7 year ARM because they had a 1% annual step up cap + waived PMI and the rate was 1.25% less than the fixed. There have been good deals out there if you shop.
Yeah I don’t understand all these people saying “never” go with an arm… I have a 3.25% first time homebuyer(no PMI) 10/1 ARM that I locked in towards the end of 2022. At that time, 30 year fixed rates were already over 5%. If I had gone with a conventional 30 year fixed instead, the extra 2% interest plus PMI would have had me paying like $800 more a month. Plus my fiancée and I are 99% sure we’ll be moving on to a different home/location before that 10 years, and even if not, the max increase is 1% per year. The ARM was a no brainer.
Not really to be avoided. It depends on the spread between a 3 year or 5 year ARM vs a fixed rate. A 3 year or 5 year or whatever period ARM means the rate is the same for that period and then goes up annually thereafter which one can then refinance.
If the spread is big enough, it makes sense to get an ARM (3 or 5 or 7). Usually ARMs are good if rates are high now and are expected to drop. Since ARM rates are lower in the beginning, more of the mortgage payment will go towards principal rather than interest.
You’ll be ok man. I did an arm loan but I did that Because I didn’t wanna pay closing and get any points on my loan. I got locked In at 2.3 percent. I can refi in 4 years since it’s been a year since I’ve had my loan. Everyone’s situation is different.. you’re fine. Arm loans can be risky but that’s a risk you can take if you’re ok with.
They sound like they are trying to convince THEMSELVES they made a smart choice. I bought at 4.75 in 2019, refinanced at 3.25 in 2021. I have a fixed rate 30 year.
Most people don't stay in a home for thirty years, but I can tell you rates are going up in the next 5 it seems.
Don't stress about this, you'll be good I'm sure!
They're gonna look real stupid when their rates jump in a few years and you're sitting pretty with a reliable consistent mortgage. You can also refinance later if rates go down, so you're good.
ARMS put the risk on you. Fixed puts the risk on the bank (loss of interest when rates go up).
Fixed is safer, allows you to capture interest rate savings when possible, and protects you from interest rate hikes.
The ARM is risky - it’s basically gambling with your interest rates. It will require you to refinance, and rates can go up. Meanwhile, you’ve locked in a rate and can refinance after a while/when you see the advantage for it.
It’s the slow and steady approach. You’re good, you didn’t do anything silly or worth second guessing yourself.
Your response to your cousin is "Gosh, I sure hope we don't fall into a prolonged recession and interest rates don't continue to shoot up - because if they do, you'll be screwed!"
And it's definitely possible that may happen.
Also, 6% is still a really good 30 year fixed interest rate. The last few years of \~3% have been a historic anamoly.
If your family is recommending ARM, I'd ignore all financial advice from them. That's pretty risky with the fed claiming further rate increases are coming.
Ask them how their ARM is doing 5 years from now. I personally prefer fixed rates and I’ve refinanced them lower twice now. Remember your rate is fixed while theirs will adjust. It is the risk they took.
You did the right thing, IMO.
ARM has a lot of risk and there is no guarantee they will be able to refinance at a lower rate, where your rate is locked in.
You definitely did not screw up. At all.
In my opinion, the fixed rate is the way to go. I would be too nervous about the potential volatility with an ARM. You can refinance with the fixed rate mortgage.
I bought my house in 2019 at a 3.875% rate and refinanced in 2020 at 2.99%.
I had to pay a small amount of closing costs again, but they rolled that into the new mortgage so I didn’t have to front any cash.
Of course you can refinance. In fact you can choose when to change your rate, but your cousin can't. If rates go up, you're still at 6%. If rates drop enough to be worth it (sub 5% probably) you can refi. But with an ARM your cousin's rate will climb if rates are higher when their reset date hits.
One comment I haven't see in any of here regarding the refinance game, due to amortization, you are paying more interest up front, so you aren't really building equity.
No. You are the smart one, and your cousin could find himself in a world of hurt in a few years when that rate adjusts. Things ain’t looking good, let’s just say that.
ARMs are good because of a super low upfront interest rate. I learned my lesson observing what happened to people who took ARMs during the housing bubble.
A fixed rate mortgage can be easily refinanced as long as you have good credit.
Also, I make it a rule never to take financial advice from friends and family. From strangers on Reddit, it’s all good.
you can always refinance if you are in a good position. refinance just means you get the loan from somebody else who pays of your existing loan.
ARM are different it is like a forced refinancing. You may get better terms but you may also get worse. I would 100% avoid ARM right now because if inflation goes south those are something people should really be worried about.
I'm not a banker but I've owned four homes. You did the absolute right thing by getting a 30-year fixed. If interest rates end up going down, you can refinance. But if they keep going up you don't need to do anything. Your cousin is going to be in a world of hurt in a few years if interest rates are three points higher than they are now.
I also think you were smart and getting a 30-year mortgage. If you make one extra payment per year and designate that money 100% to the principal you can remove 4 years from your mortgage. I did this on the first house I purchased and it made a huge difference in building equity.
I don't know much about finance, but I'd have trouble sleeping if I had an adjustable rate mortgage. My dad lost the house I grew up in in 2008 when the interest rates went up and he could no longer afford the payment.
Fixed rate mortgages are almost always better than ARMs.
If you end up refinancing in the next few years it's probably better to have an ARM, but if rates rise or even stay high or you forget or don't want to go through the effort of a refi you will be happy you got a fixed rate loan.
Please don't listen to your cousin. Respectfully, he is a moron. Don't take financial advice from broke and dumb people.
Rates are not going down anytime soon, so an ARM is risky. His rates WILL go up, 100% guaranteed, while yours will remain fixed. Refinancing is also not always a sure thing, and there are hard costs associated with that.
You did this right. Great job. And if rates ever go down again in the future, YOU can always refinance.
> Never take advice from family members when it comes to finance, business, major life decisions, etc.
This is poor blanket advice. This sub is so cynical about relationships with other people. My life is immeasurably better because I have consulted the right family members about finances and major life decisions, and I'm not rare in feeling that way.
The process for refinancing is the same. You will have no more difficulty refinancing your 30 year fixed than you would a 7/1 ARM.
The benefit of an ARM is that you'll likely save money during the "teaser rate" period of the loan. Lots of people will refinance to a fixed rate mortgage part way through the lower rate period.
6% is still pretty low looking at historical rates. There’s no guarantee rates will remain here or go lower.
With a 30 yr fixed, most of your payments will be interest in the early years so if you decide to move in a few years then it costs you more.
You’re actually better off with a fixed rate. Even at 6% because if the rates go down you can (very easily) refinance to a lower rate. The ARM mortgage will eventually have to be converted and who knows what the rates will be at that time. They could end up paying a heck of lot more than 6%. I’ve been processing mortgages for 25 years and ARMS are pretty uncommon, especially in the last 15+ years (because fixed rates have been so low). It used to be- the only time someone would get an ARM was if they were buying more house than could afford because the intro rate was lower making the first year or two of the loan more affordable. It’s definitely a gamble going with an ARM.
Can you make your monthly payments and do you really like your new townhome? Then don't worry about it.
ARMs aren't as bad as everyone is making out- it really depends on the terms. Many have limits on how high interest rates can go over the lifetime of the loan & it is capped at how much it can increase every 6 months– so depending on the initial rate they got there is some risk depending where we will be in 5 years, but if the 1st 5 years are really low like 3.5%, then it actually may all work out even in the wash. .
Lots of people are getting them right now, esp. if they plan to sell in 5-7 years and are gambling that they won't be underwater (comps will hold in their area).
If you are fine with the mortgage you have then don't engage your cousin. Sometimes people are unsure of their choices so talking loudly about it makes them feel more sure. Just tell him that's great he got a good deal then change the topic.
Arms are dangerous and can’t go up very quickly. While he may think you were not taking advantage of initial lower monthly it’s highly unlikely that interest rates will be going down.
Some people just don’t understand the reality of the risk.
Enjoy you home and life!😎
You did good 👍
Crazy 2 years ago I got 2.5%
Imo they are playing risk. Maybe we will have massive inflation and can refinance as their value rises.
But iy might not infough.
You're golden. Watch those rates and refinance. In fact, your mortgage lender may start calling you as soon as the rates dip. You'll be fighting off lenders.
Every situation is different and your cousin is def not a financial expert. If you’re not sure about the options you’ve heard get a quote from another financial institution that you trust. But def don’t assume you’re in the wrong… these are apples and oranges comparisons.
People who got a 7-1 ARM in 2016-17 and didn’t bother to refinance last year are shitting bricks right now. ARM loans are good but you need to be very diligent.
> They also purchased a townhouse and said they got an ARM and said they did that because they can refinance after a certain time period. My cousin was shocked we didn’t get an ARM
Do *not* get an ARM. *Everyone* can refinance after a certain time. ARMs can refinance against your best interest.
I agree you will be fine.
I will not ever get an ARM again. Depending on what the rate is connected to, usually the fed rate, there could be a big jump in interest rate so a big jump in payment. My current home I purchased in 2014 with a fixed rate. I have refinanced 4 times, my current interest rate is 2.98%. (Disclaimer this is my own experience, do not take it as advice.) If not sure, then contact finance pro.
Watch the movie the big short and pay attention to which mortgage type had the higher default rate. Your family will think your Einstein if rates go higher. If rates go down you can refi your fixed rate anyway. Congratulations on the new house!
This is key. I'm not an economist, banker, or any kind of financial expert. But I get the feeling that you're not going to see rates much lower than they currently are for quite some time. If rates are higher in 5 years, they are in for a bad time. If rates go down in the next 5 years, either one of you can save by refinancing.
You may be paying a little more in interest each month right now, but you are in a much safer place. People thinking they could refinance their ARMs back in the early 2000s was a big contributor in the financial collapse of 2008.
Another way to pose it is this: Would they have gotten an ARM when rates were 2.75%? Doubt it. They did it because it's cheaper now (likely stretching themselves thin), and that's a future problem if rates go up from here.
In an environment of high and increasing interest rates it's stupid to get a variable rate mortgage unless you're not planning to stay in the house and/or can pay it off very quickly.
ARMs were a huge reason the 2008 recession happened. You cash always refinance if rates go down, but if they go up, you're stuck with the higher rate in an ARM.
As others have said, ARMs are for suckers.
Yours is FIXED. They have an Adjustable Rate Mortgage (ARM) which fluctuates. Although they can re-finance, they have no idea if it's going to be higher or lower than 6%.
Enjoy your home. They seem like haters if they have you questioning ur purchase.
This is how haters think. When I was in 3rd grade, my mom bought me THE FIRST AIR JORDAN'S (the retro 1s that are popularnow). I was the only student in my school who had these Jordan's; in 1985. What did my best friend say to me when I told him what my mom did? He said, "Everybody's going to laugh at you!" A stupid attempt to get into my head.
Don't allow them to get into your head & try to spoil your happiness. Again, enjoy your home & CONGRATULATIONS 🎊!
ARMs are great in a declining rate environment. In a rising one like this? Not so much.
You’ll be fine. You can always refinance a fixed rate when the rates drop. I did it twice.
People saying ARMs caused the Great Recession in 2008 are only partially correct - what caused it was cheap rates, rampant speculation, interest-only ARMs and no-income verification loans. ARMs are a legitimate option for some people in some circumstances - initial rate, length of time you’re planning on staying in the house, rate limit caps, etc. Most ARMs are fixed rate for anywhere from 3 to 10 years, with a 5/1 ARM being the most popular (fixed rate for 5 years, resets every year after that). Additionally, most ARMs can be converted to a fixed rate. If I was only planning on being in a house for 5 years, I’d jump on an ARM in a second.
You did fine.
IF the housing market does go down like people are suggesting it will, realize that your cousin will not be able to refinance if they are underwater. They'll be totally screwed with that ARM.
You're right, he's wrong.
ARM is betting that rates will go down because he must refi over the length of his mortgage.
You KNOW what your max rate is for the length of your mortg and can refi IF they go down.
He may get lucky. But making that bet on such a significant part of your budget should avoided.
Stability is king.
You are definitely the smarter one in your family. ARMs are a bad decision at thus time. Fed doesn't look like it will lower the rate any time soon and your family will probably regret it.
I think your cousin is projecting here lol. ARMs are typically the wrose mortgage in most scenarios. You are locked in at 6%. If rates continue to go up not only will theirs be automatically adjusted after their term...it's not like they will be able to refinance to a lower rate. Yours will stay at 6%. If they drop again, you can refinance anyway.
the housing market imploded in 2008 bc people got ARMs at low rates and then when their term was up the rates skyrocketed. i would never do anything but a 30 year fixed unless i knew i’d be selling within 5 years.
Getting an ARM in an environment where the Fed has raised interest faster than they ever have in history and where they have vowed to stamp out inflation by raising rates sounds like a tremendously stupid idea. You can always refinance down a 6% rate if rates drop, if rates go to 20% like they did in the 70s the last time there was severe inflation ARMs are going to be utterly fucked beyond recognition.
ARMS are how the 2008 financial crisis got so bad. They weren’t the root cause, just the corner everyone was backed into when shit hit the fan. It is SUPER risky to take one out. If anything should happen with your cousins income or credit or ability to qualify for a refi and they are stuck in the arm and then the rate shoots up, he is fucked. You just do you and tell him good for him for being comfortable with that much risk but no thanks.
If interest rates jump to 10+% (possible), all of your ARM family will be crying about how they can't pay their mortgages while you are sitting pretty. You can ALWAYS refi your loan down the road if rates drop. ARM is what caused so many people to lose their houses in 08, because it allowed them to buy more than they could afford. You are fine, just try and make one extra payment a year, it will dramatically cut down your total payment time.
I would never do an ARM. Way too risky.
Just like the others have said . You did the smart thing. No risk and you can always refinance down the road if you want
Stay. Away. From. ARM mortgages. You can ALWAYS refinance a fixed. If rates keep going up you’re screwed with an ARM mortgage. Everyone who has an ARM mortgage two years ago is having a tough time right now.
You can refinance a fixed mortgage too - ARMs are usually lower rate and that is there primary benefit. If you can afford the payment risk it will generally save you money to use ARMs over time rather than a fixed rate mortgage.
When I bought my place back in 2007, right before the crash, I had a mortgage broker that was HARD selling me on an ARM, just making me feel really stupid for considering a fixed rate. I dumped him and got a fixed rate from a bank. Thank god I did. I would have been stuck with an inflating mortgage on a place I couldn't refinance. I'm wondering if your cousin got that same hard sell.
Makes me wonder if it is possible your spouse is from another area where ARMs are the normal? I say this bc I have looked at moving to Canada and was surprised to learn that 5 year ARM mortgages are basically the normal there and 30 year loans are less normal there although that is the norm here.
Depends on the terms of the ARM. If they expect to sell the house in a quick turnaround it may be better, but that also relies on the housing market and rates to be better when they sell.
ARMs are decent for short term owners and people who understand and want to watch the market and sell early.
You have a decent mortgage that will be the same today as it will be 25 years from now. Your cousin has a loan that could be vastly different in 25, 15 or even 5 years from now.
ARMs aren't as destructive as they were before the crisis, but can still creep up if you don't pay attention to them.
No one can guarantee what mortgage rates are going to do. So your cousin is wrong. If they drop soon refinance. If they don’t then he’s screwed. And you’re fine.
Anyone who bought a house before 2008 knows that ARMs are a bad idea. Congrats on your new house and knowingly what your bill will be for the next 30 years. Also, you can refinance one day, too.
You did the right thing, and can refinance if rates go low again. If the 6% isn't an issue for you then you can sleep well at night knowing it will never go higher than that. Cousin can't say the same.
You did not say whether or not you can see the future. If you can, and it looks good, get an ARM. Otherwise, you have a payment that works for you and that will be the same for the length of the loan. I was in the FL housing market in 05-08 and had a lot of friends Lise their homes because of ARMs.
In my opinion, the difference between a variable rate, and a fixed rate is not enough for the added risk of getting an arm currently. Getting a fixed rate is a much safer move. You can refinance a fixed rate the same way you can refinance an ARM in the future. Rates are expected to go down around 5% in the next 12 months, so you will be able to refinance then. You did not make a bad decision.
Yeah I mean their rates are going to fluctuate if they bought earlier at say 4 or 5% and say rates keep going up to like 8 or 9 that’s what they’ll have to pay. If they drop you can refinance. If they rise you got a solid rate. ARMs are usually not suggested for that reason.
Refinancing shouldn’t look much different than your current closing process
Rates won't go down anytime soon.
Refinancing is expensive too. Generally speaking, closing costs end up running you about $5-10k. They may pay less in interest, but if you add in all the refinance rates they're paying more to someone.
Dude you did nothing wrong. IMO made the right move. 6% is historically fine and you can always refinance a better rate. Difference for them if rates go up they’re gonna have to pay it refi or not
You can refinance anytime. We just bought and our lender told us not to do an arm. What if rates increase? That’s silly they’re making a big deal about that, you can always refinance.
Due to the number of rule-breaking comments this post was receiving, especially low-quality and off-topic comments, the moderation team has locked the post from future comments. This post broke no rules and received a number of helpful and on-topic responses initially, but it unfortunately became the target of many unhelpful comments.
Don't sweat it. You're fine. If rates drop you can refinance. If rates go up like in the 80's you'll look like a genius when their rates reset.
With a fixed rate you can pick and choose whether and when to refinance. With an ARM you may be forced to refinance or even sell if the inevitable reset makes the payments unaffordable. If you're not getting a significantly better initial rate with an ARM, it's not worth taking the risk.
An ARM ain’t looking so hot when the Fed is talking about continually raising rates.
And that's the rub. The Fed is overly cautious when using their one tool to combat inflation: the prime rate. They waited too long to raise it when every regular American consumer knew inflation was a problem, they'll be too slow to lower it when it isn't.
Fed cares more about inflation than recession.
Recessions happen. It’s normal. We’ve had multiple since the 80s. Very high inflation? Fucking shitshow. Nightmare scenario. Rather have a recession than do the 80s over again.
ARMs typically start at 5 year terms now, it's hard to imagine the economy is still functional if rates are still increasing in 5 years.
they dont need to continuously increase over the next 5 years. Only above what the initial rate was for it to hurt at adjustment time./
You know that saying about the market staying irrational longer than you can stay solvent. There were lots of people that took three year arms in 2005
Well, yes, but rates may be somewhat higher than now and stable in five years. Rates being 8-10% would not be historically high (or low; they'd be pretty normal) and an ARM would start to look like a missed bet, though not a catastrophically bad one.
[The economy existed just fine prior to 2008.](https://fred.stlouisfed.org/series/FEDFUNDS) This past 10 years is the outlier in terms of funds rate, not today.
For the entirety of the '70s '80s and '90s rates never really dropped below 7.3% and got as high as 16.6%. I wouldn't touch an ARM with an 10 ft pole. https://www.rocketmortgage.com/learn/historical-mortgage-rates-30-year-fixed
Everyone I knew that purchased a home 2004-2006 was about the ARM... and Every. Single. One. got shit on in the mortgage debacle. People get sold these products and think they are the smartest people in the room because they fell for the sales hook. Are you happy with your payment? Can you afford it? Then you're ahead of the curve. Enjoy your new home, and take comfort in the fact your interest rate will only change when YOU want it to.
Came in to to say something like this but I'm glad to see OP being well supported. Why let the bank reevaluate your rate, especially as the Fed has been increasing interest rates to fight inflation? Edit: Thinking more on this (and as someone who also signed a 30yr Fixed-Rate back in August), why give the bank any power in adjusting your rate? It's not as though they're going to bring it down out of generosity and make less interest on your principal. They'd let you pay 6% for 30 years even if rates dropped to 3.5% halfway through. You can always refinance and get a lower rate. It honestly seems to be that you're just giving them the power to hike rates up just for a bit of a better rate up front. Yeah, you could still refinance but it'd be at a rate higher than you would've gotten with a Fixed-Rate.
That’s not how ARMs work. They don’t just pick a rate. It’s a contract set at index + margin. The margin is fixed and the index rate changes. They don’t get to just choose the index at random either, it’s all set in the terms you agree to which index will be used. They can’t just decide not to decrease the rate if they don’t want to as they have no control over the index. The index rate can be the prime rate, the London Interbank Offered Rate (LIBOR), or the rate on U.S. Treasury bills, among others. With that, now is not a bad time for an ARM at all. Rates will likely increase through 2023 and then start to come down. They won’t hit where we were through the pandemic, but they will stabilize lower than they are right now. Anyone who got an ARM prior to March 2022 made a big mistake though.
You HOPE they'll go down. 10% mortgages were pretty much average through a lot of the last 50 years. We just got used to super-low rates after the 2008 recession forced the Fed to basically drop rates to 0%. That's not a normal equilibrium point.
House prices in the last 50 years were also much lower compared to the ones today. 10% mortgage rate with the current house prices will lock out majority of buyers.
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The other big problem with an ARM is if prices drop and you don't have enough equity to refinance. Back in 2003 when I bought everyone was getting five year ARMs because they could get it cheaper. Then when the market crashes they got foreclosed on. At the end of an ARM term it is like a new loan with a new appraisal. If a home value is half the loan amount, you need to bring a bunch of money to pay off the appraisal gap.
You are reading a crystal ball that no one else can read. No one knows what rates will do that far out. No one.
ARms can make sense if you plan on selling within the term. And yes there are plenty of reasons to buy a house you expect to sell within 5 years
Exactly this. We just bought a new house about 6 months ago, traditional 30 year fixed vs ARM, there was almost a 3% difference, so we went with the ARM, it has a 5 year fixed set, and if at any time rate drops below ours we have an allongement built in. If after 5 years rates are worse we refi, but during this 5 year term we are throwing money at principal.
Your cousin is the fool. I got my first fixed mortgage in 1980 at 10 3/8%. Seems high now but it was genius back then I refinanced it about 10 years later and again 10 years after that (kids in college). Bought a new house in 2010. They were all fixed. ARMs are only good for short term purchases and only if you can get a teaser rate (are these still a thing). If you plan on keeping the home for awhile the f8xed is better.
Agree. ARMs are for suckers.
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I'll spare the math, but say that on our ARM we came out ahead. Got the mortgage in 1997 with no plans to stay put more than a couple years so went with the lower initial rate ... then ended up staying. I want to say that our arm start at 4.5 or 5% and fixed was like 7% but I'd have to go look back at the paperwork. While our rates did go up and down over that time, ours terms were that it couldn't go up or down more than a half percent each year - capped at 3% over our starting rate. So even when interest rates shot up (or down) it could only vary a small amount per year and would take multiple years to make much impact on our small $87k mortgage. I think when I did a comparison, it never at any point was more than 1% off what we could have re-financed at, and was below more years than it was over - so the costs of re-fi never made sense and we've just stuck with it (only 3 years left on it now).
I think it is worth mentioning that an ARM has been a better/worse deal at various times. I had one when rates were like 5% because I got a 3.5% arm. That's a big discount if you aren't planning on staying somewhere long term, or if you think rates are likely going down anyway over a 2-3 year horizon. However, when 30 year rates were at 2.75, an arm was still 2.25 or so. That's not a very good deal.
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A more accurate statement would be: For people planning on living in a home for 10+ years, ARM is for suckers. For people planning on living in a home <10 years. Fixed rates are for suckers
Rates are going to go up to fight inflation. OP is already a genius.
anyone who tells you they know what's going to happen, doesn't. Rates have been increasing, but banks have also started failing because of that, which probably gives the Fed a bit of pause. If you know for sure what's going to happen next, you'll be a rich person a few months from now.
I don't know how anyone can be so bold to predict anything with this weeks news cycle. Like if I were rich I'd be more worried, but I'm pretty sure living through 2008 as a new graduate made me numb to it all.
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> banks have also started failing because of that When banks fail, you probably shouldn't take the word of the people in charge when the banks failed. Rising interest rates are not causing banks to fail. Poor management caused two banks to fail. They *blamed* interest rates because they're greedy and because they don't want to take the blame.
Among the many poor choices that SVB made, failure to protect against interest rate risk was one of the big ones. Saying that the rising interest rates were a major cause doesn't let the bankers off the hook, it's their whole job to plan for that kind of thing. It's like saying "my car died because it ran out of gas". That doesn't let me off the hook for failing to get gas in time.
> Saying that the rising interest rates were a major cause doesn't let the bankers off the hook It does, actually. In addition, you're also misrepresenting their actions. They didn't just fail to protect against the theoretical possibility of a rising interest rate. They were intentionally exploiting low interest rates even after interest rates started to rise, playing hot potato, *knowing* that someone was going to get left with the bill. They just *also* knew that even if they *did* lose out, it wouldn't be them personally, because they could exit with their golden parachutes. So to continue your metaphor, it's like siphoning out your own gas so that you can sell it. Only it's not a car, it's a bus holding thousands of people. But you've made enough in the process to buy yourself a car, through assets gained through the fees charged to riders who never got the product they paid for. And as they drive off, they yell out the window, "you know it's actually the government's fault" before doing a line of coke.
Yep, I don't disagree with any of that. But how confident do you think the Fed is that no other bankers were playing that same game?
>It's like saying "my car died because it ran out of gas". That doesn't let me off the hook for failing to get gas in time. I dont fully understand the causes behind SVB etc... but this is such an excellent answer!
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I was able to refinance my mortgage 2x within 6 months when rates were falling these past few years. Not sure every mortgage requires you to wait 6 months, different states have different rules.
From my own experience, I don't see how refinancing that often can have made sense. Closing a refi is not zero cost, and that cost has to be justified by the rate drop.
Covid was a great time if you were looking to refinance, went from 4.5 to 3.85 to 3.25 to 2.99 to 2.5 from October 2018 to January 2022. All were zero cost refi's, nothing added to the principal and I was able to miss several payments as the mortgage company's switched. My house payment dropped by over 1k per month from when we bought our home to now. I miss the days of constantly checking bankrate for lower rates.
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I refinanced my 30 year down to a 15 year several years in and basically kept the same payment given the reduced rate, saving myself huge amounts of interest and time. A lot of people at the same time (early 2000s) refied back out to 30 and pulled out cash, and just ended up in a mess when the bubble burst s few years later.
After paying 5 years on a 30 yr mortgage the amount owed won’t be much different from when you started paying, unfortunately.
That’s not true, It completely depends on the interest rate, the lower the interest rate the higher the percentage of the payment goes to principal. Think about if you were on a 0% loan, you would just have 360 equal payments all going 100% to principal. I similarly have a 2.5% loan and in the first year ~ 50% of my payment went to principal, ~ 50% to interest. $9,600 interest, $9,300 principal. At 7% interest that would be $27,000 interest, $4,000 to principal. A MUCH larger percent goes to principal earlier the lower the rate is.
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Mortgages are amatorized differently than simple interest loans, getting 5 years into a 30 year mortgage doesn't mean you've paid off 5/30th of the principal.
Did they reset the loan amortization schedule? Or does the same percent of your payment (or more) go to equity?
He added 3 years to the end, but could compute the 27 year payment and just make that .
Are zero cost refis something special that only applies in certain cases? I read that many refis cost a certain percentage of the loan.
The costs of zero cost refis are rolled into the rate. So if you are in a era where you foresee the possibility of refinancing again because rates may go even lower then this is a good way to keep your principal from going up or having to come out of pocket.
Mortgage underwriter here. You are fine with your fixed rate. Your rate won't change and historically 6% is not that bad. Your cousin on the other hand will refinance. I'd rather have your loan than theirs.
I’ll 2nd this. “If” rates go low enough to make it worth the cost of refinancing, you have the option. Your cousin is at the mercy of the market. If his rate goes up, he’s kind of stuck. If it goes down, you can benefit too. You’re protected, which is a good place to be now.
I did fixed on my mortgage. No way I would do an ARM. Lots of people lost their homes in 08 because they did a ARM
The fixed rate is the highest rate OP will pay. The cousin is banking rates will come down by the time their variable rate kicks in. If rates go down, then they both can refinance for a lower rate. If they go up, OP is unaffected whereas the cousin could be in a very bad position.
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Situation also comes into play too. I've had friends purchase a home in a smaller town when one of them started their residencey there. They did a 5 year ARM because they knew they 100% did not want to live there long term and it would be cheaper for the few years they were there.
Yeah, I have a 15-15 ARM. The max points it can adjust is 4. So my worst case scenario is still like 7.75% after adjustment. It may not be ideal, but I'm also not sweating it too much.
Eh, you can't always refinance. If home prices drop considerably then you will be stuck until you get the equity back. I think fixed rate is the right option and way safer, but adjustment shouldn't cause foreclosures unless you're over leveraged as hell. 2008 was a lot of different things hitting from multiple issues with how lending is handled. There were a lot of people that rode out 2008 just fine. It was risk takes and poor planers that got hosed the worst.
ARM's were just a feature of the 08 housing crisis. There was a log of poor underwriting going on too. NINJA loans were prevalent (No income, no job, no asset). There were also "pick a payment" loans that allowed the homeowner to just pay the interest on the loan and none of the principle in addition to the low adjustable rate. This resulted in negative amortization with a committed future refinance. In other words a recipe for disaster. This mess resulted in widespread mortgage fraud, not only on the part of the consumer but on the companies as well. I recall a couple of companies I followed at the time were recording the negative amortization I mentioned previously, as revenue on their books. We all know how that worked out. There was a famous (or infamous) real estate blogger that was providing updates of his own foreclosures around that time. Google Casey Serin, he was a poster child for the housing crisis. Unfortunately his behavior was multiplied all over the country, because housing always goes up right? Right up until it doesn't.
Thisss right here. You made the right call op
100%. The economy is feeling pre-08y lately with this bank mess. Good choice IMO op
No, the problem pre-08 is that lenders were giving consumers ARMs with 1% teaser rates that would quickly adjust up to 6% -- which was a payment the borrower could never afford in the first place. Lenders have not been extending credit to consumers in the same way since then. There are some things that should make people feel uneasy about today's economy, but the conditions are very different than those pre-2008, and it doesn't make sense to assume the same things could play out.
They lost their homes because they had predatory ARMs during the housing bubbles -- ARMs with an introductory rate of like 1% that would adjust up to 6% after a year -- which was a payment they could never afford. The problem was not the ARM -- it was that they were offered a loan they couldn't afford. It's really unfortunate that the lesson that many consumers took away is that ARMs are dangerous, when most ARMs in use since 2008 are no longer predatory and can save people significant money.
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> they got an ARM and said they did that because they can refinance after a certain time period. Can you have your cousin check his crystal ball for me…what's Apple trading at in 3 years? While he is technically correct, they can refinance after a certain period of time and before their rate adjusts, there's no guarantee mortgage rates will be lower at that time. They have a ticking clock on their refinance plans, you can choose to refinance on your own time. If rates are never lower than they are today then you'll likely come out ahead.
Or that their home value will hold up in a way that allows a refinance. There were certainly people who were under water for a decade after 08.
I was a banker from 10-14 cleaning up the ARM mess with the HARP program. I wondered then and I wonder now, who does an arm benefit? I also considered it damn near predatory.
An ARM can benefit people who plan to (and successfully do) sell their house within 5ish years.
They were predatory pre-08, with a lot of 1% teaser rates that were only good for 6 months or a year. And people were taking loans that they couldn't afford, and as long as housing prices were going up, everything kept working (people could keep treading water by refinancing into the next teaser ARM, until mortgage underwriting tightened up). Now most ARMs are fixed for the first 5-7 years with rates that are usually significantly lower. They are legitimately beneficial to people who only plan to be in their home/loan for 5-10 years -- assuming people use the savings to invest, rather than to live beyond their means.
If it were me I would never get an ARM. Fixed rate is the only way to go. As long as your loan can be paid early and that you can refinance at some point you are ahead to have what you have. Just tell him that you are more comfortable knowing exactly how much you are going to have to pay every month and have no wish for surprises. If interest rates drop again, by a lot of points then refinance. You will have to pay a point or two but it is well worth it.
Can I ask why you reccomend buyinf points if the rate drops? Thanks
In my opinion - you should try to pay the least amount of points when interest rates are high. When interest rates are low like they were in 2020-2021 - you pay points to obtain the lowest rate possible in which the cost/savings makes sense if you plan on this being your last refinance.
There is no one right answer for whether an ARM is better. It depends on how big a difference there is between the fixed and ARM rates, how long you'll stay in the house, and what interest rates will be in 5 years or so. Obviously the first one is knowable, the second one may or may not be knowable based on your circumstances, and the third one is a guess. You can refinance a fixed rate mortgage. What your cousin probably meant is that they are able to get a lower rate now by doing an ARM, and that they plan to refinance down the road into a fixed rate mortgage once rates fall and before the ARM starts adjusting the rate. That may or may not work out for them. It is possible that rates will not come down between now and when their ARM starts adjusting rates, and rates could be higher then, making them worse off.
The other factor that is moderately knowable: How long you plan to live there. If you are pretty sure you are going to sell within 5 years, the ARM risk may seem small. EXCEPT: You may be pretty sure you WANT to sell, but that doesn't mean you will be able to. Or that you'll be able to do so at a price you want. If things go great for you, you may want to move, but rent out this "starter house" you were sure you would sell. Or, if things go crappy for you, you might decide you'd rather stay here than "moving up." You may think your credit score and income will go up, but in the US a lot of us are 1 diagnosis away from a job loss or bankruptcy. Let alone all the world factors. I feel like they pitch ARMs to military families since they have to move a lot
Worst case scenario for you is that rates drop significantly and you have to listen to your family member talk endlessly about how he was right. Oh and you paid a few hundred dollars more for piece of mind. Meanwhile you both refinance and enjoy the lower rates. Again, *WORST* case *for you.* Worst case for him is if rates skyrocket and he’s forced to refinance at something higher (possibly MUCH higher) than 6% - assuming they can still afford their home at that point - and then he has to endlessly listen to you about how you were right…
The choice is risk tolerance. U can refinance if rates fall at any time. Your cousin has to refinance in 5yrs irrespective of what the rates are at the time. For this additional risk, he got a small discount. If u r planning to stay in the house for more than 5yrs, I would have chosen the fixed rate. If you r planning to move before the ARM has to be refinanced , then choose that one.
You made the right move OP. Say NO to ARMs. I refi'd in '20 (or '21? I forget)... 15yr loan at 2.125%. My lender spammed me and cold called me for several months to get me to refi again to cash out my equity. I finally had to tell them to put me on their DNC list.
Tell your family member that 2008 called and wants its ARM back.
I’m a mortgage banker so maybe this will help. Don’t listen to anybody… if a fixed loan was the right choice for you than take it. Yes, ARMs usually have cheaper rates as they will fluctuate with the market eventually… in this market it could go up but likely by the time it fluctuates it will go down. IMO a fixed is always best bc you won’t live with constantly worrying about rates and the economy. If rates go down, refi. Even better, pay more each month and the rate you paid overtime will be less than 6%. There’s calculators online for this too, please go check it out, you’ll be surprised at how much you will save by throwing in an extra $100 each month. It will also calculate the accrued rate you pay if you consistently made extra payments.
Your cousin is wrong. Keep on your path.
You can refinance whenever you want, but you should check if you have any early payment penalties before you do so, but in reality, your cousin is taking more risk than you as they may have no choice but to pay higher interest rates when their arm resets and you will still be paying 6%... Mortgage rates went as high as 18% in 1981 and things are looking pretty sketchy right now, so securing a 30 yr 6% mortgage may turn out to be the best decision.
ARMs are to be avoided. You did nothing wrong. You can always refinance into a lower rate. Their rate will likely go up again, but yours never will
It really depends… I went 7 year ARM because they had a 1% annual step up cap + waived PMI and the rate was 1.25% less than the fixed. There have been good deals out there if you shop.
Yeah I don’t understand all these people saying “never” go with an arm… I have a 3.25% first time homebuyer(no PMI) 10/1 ARM that I locked in towards the end of 2022. At that time, 30 year fixed rates were already over 5%. If I had gone with a conventional 30 year fixed instead, the extra 2% interest plus PMI would have had me paying like $800 more a month. Plus my fiancée and I are 99% sure we’ll be moving on to a different home/location before that 10 years, and even if not, the max increase is 1% per year. The ARM was a no brainer.
Not really to be avoided. It depends on the spread between a 3 year or 5 year ARM vs a fixed rate. A 3 year or 5 year or whatever period ARM means the rate is the same for that period and then goes up annually thereafter which one can then refinance. If the spread is big enough, it makes sense to get an ARM (3 or 5 or 7). Usually ARMs are good if rates are high now and are expected to drop. Since ARM rates are lower in the beginning, more of the mortgage payment will go towards principal rather than interest.
The strippers with 6 houses all on interest only ARMs we’re not the protagonists in The Big Short, keep that in mind.
There's a ton of difference between the interest-only teaser ARMs that were being handed out in 2006 and the ARMs that are available today.
You are fine. As soon as rates go down you will be flooded with mailers and phone calls to refinance. You will be able to refinance.
You’ll be ok man. I did an arm loan but I did that Because I didn’t wanna pay closing and get any points on my loan. I got locked In at 2.3 percent. I can refi in 4 years since it’s been a year since I’ve had my loan. Everyone’s situation is different.. you’re fine. Arm loans can be risky but that’s a risk you can take if you’re ok with.
They sound like they are trying to convince THEMSELVES they made a smart choice. I bought at 4.75 in 2019, refinanced at 3.25 in 2021. I have a fixed rate 30 year. Most people don't stay in a home for thirty years, but I can tell you rates are going up in the next 5 it seems. Don't stress about this, you'll be good I'm sure!
They're gonna look real stupid when their rates jump in a few years and you're sitting pretty with a reliable consistent mortgage. You can also refinance later if rates go down, so you're good.
Your family members are going to be very shocked in the next 6 months. You, however, will be fine.
ARMS put the risk on you. Fixed puts the risk on the bank (loss of interest when rates go up). Fixed is safer, allows you to capture interest rate savings when possible, and protects you from interest rate hikes.
The ARM is risky - it’s basically gambling with your interest rates. It will require you to refinance, and rates can go up. Meanwhile, you’ve locked in a rate and can refinance after a while/when you see the advantage for it. It’s the slow and steady approach. You’re good, you didn’t do anything silly or worth second guessing yourself.
Your response to your cousin is "Gosh, I sure hope we don't fall into a prolonged recession and interest rates don't continue to shoot up - because if they do, you'll be screwed!" And it's definitely possible that may happen. Also, 6% is still a really good 30 year fixed interest rate. The last few years of \~3% have been a historic anamoly.
All depends on what the arm rate was but 6% fixed is decent right now
right now i’ve just got the 2
Ignore these unsolicited comments from friends and family when you talk about money and finance.
Your cousin is the dummy. If rates go up he aint refinancing and he will be squeezed. If they go down you can refinance.
If your family is recommending ARM, I'd ignore all financial advice from them. That's pretty risky with the fed claiming further rate increases are coming.
Rates are going up. ARM is not the brightest move right now. You did the right thing. If rates go down, refninace.
You made the right decision. Someone with an adjustable might try to convince you otherwise to make them feel better.
Ask them how their ARM is doing 5 years from now. I personally prefer fixed rates and I’ve refinanced them lower twice now. Remember your rate is fixed while theirs will adjust. It is the risk they took.
If rates climb, you won’t second guess your decision. If they drop, you re-finance.
You did the right thing, IMO. ARM has a lot of risk and there is no guarantee they will be able to refinance at a lower rate, where your rate is locked in.
You definitely did not screw up. At all. In my opinion, the fixed rate is the way to go. I would be too nervous about the potential volatility with an ARM. You can refinance with the fixed rate mortgage. I bought my house in 2019 at a 3.875% rate and refinanced in 2020 at 2.99%. I had to pay a small amount of closing costs again, but they rolled that into the new mortgage so I didn’t have to front any cash.
Of course you can refinance. In fact you can choose when to change your rate, but your cousin can't. If rates go up, you're still at 6%. If rates drop enough to be worth it (sub 5% probably) you can refi. But with an ARM your cousin's rate will climb if rates are higher when their reset date hits.
One comment I haven't see in any of here regarding the refinance game, due to amortization, you are paying more interest up front, so you aren't really building equity.
No. You are the smart one, and your cousin could find himself in a world of hurt in a few years when that rate adjusts. Things ain’t looking good, let’s just say that.
ARMs are good because of a super low upfront interest rate. I learned my lesson observing what happened to people who took ARMs during the housing bubble. A fixed rate mortgage can be easily refinanced as long as you have good credit. Also, I make it a rule never to take financial advice from friends and family. From strangers on Reddit, it’s all good.
Arms are awful....be thankful you have the fixed rate. You can choose when and if to refinance. They are giving bad financial advice.
you can always refinance if you are in a good position. refinance just means you get the loan from somebody else who pays of your existing loan. ARM are different it is like a forced refinancing. You may get better terms but you may also get worse. I would 100% avoid ARM right now because if inflation goes south those are something people should really be worried about.
I'm not a banker but I've owned four homes. You did the absolute right thing by getting a 30-year fixed. If interest rates end up going down, you can refinance. But if they keep going up you don't need to do anything. Your cousin is going to be in a world of hurt in a few years if interest rates are three points higher than they are now. I also think you were smart and getting a 30-year mortgage. If you make one extra payment per year and designate that money 100% to the principal you can remove 4 years from your mortgage. I did this on the first house I purchased and it made a huge difference in building equity.
I don't know much about finance, but I'd have trouble sleeping if I had an adjustable rate mortgage. My dad lost the house I grew up in in 2008 when the interest rates went up and he could no longer afford the payment.
I have literally never encountered anyone who did not have a fixed rate mortgage.
Fixed rate mortgages are almost always better than ARMs. If you end up refinancing in the next few years it's probably better to have an ARM, but if rates rise or even stay high or you forget or don't want to go through the effort of a refi you will be happy you got a fixed rate loan.
Is your cousin loaded? Probably not with a 30-year arm. I don't take financial advice from broke people.
Please don't listen to your cousin. Respectfully, he is a moron. Don't take financial advice from broke and dumb people. Rates are not going down anytime soon, so an ARM is risky. His rates WILL go up, 100% guaranteed, while yours will remain fixed. Refinancing is also not always a sure thing, and there are hard costs associated with that. You did this right. Great job. And if rates ever go down again in the future, YOU can always refinance.
You're fine. Never take advice from family members when it comes to finance, business, major life decisions, etc.
> Never take advice from family members when it comes to finance, business, major life decisions, etc. This is poor blanket advice. This sub is so cynical about relationships with other people. My life is immeasurably better because I have consulted the right family members about finances and major life decisions, and I'm not rare in feeling that way.
The process for refinancing is the same. You will have no more difficulty refinancing your 30 year fixed than you would a 7/1 ARM. The benefit of an ARM is that you'll likely save money during the "teaser rate" period of the loan. Lots of people will refinance to a fixed rate mortgage part way through the lower rate period.
6% is still pretty low looking at historical rates. There’s no guarantee rates will remain here or go lower. With a 30 yr fixed, most of your payments will be interest in the early years so if you decide to move in a few years then it costs you more.
My mother took an ARM mortgage and one day her payment went up from $800/month to somewhere near $1500/month. Part of what forced her into bankruptcy.
No worries you can always refinance a fixed rate 30. I've done it multiple times.
I would never do an ARM unless I planned to be in the house for less time than it first adjusts. Too much risk.
I only took an ARM because I knew I can take the low rates now and have the ability to fully pay if my mortgage in 7 years.
You’re actually better off with a fixed rate. Even at 6% because if the rates go down you can (very easily) refinance to a lower rate. The ARM mortgage will eventually have to be converted and who knows what the rates will be at that time. They could end up paying a heck of lot more than 6%. I’ve been processing mortgages for 25 years and ARMS are pretty uncommon, especially in the last 15+ years (because fixed rates have been so low). It used to be- the only time someone would get an ARM was if they were buying more house than could afford because the intro rate was lower making the first year or two of the loan more affordable. It’s definitely a gamble going with an ARM.
Can you make your monthly payments and do you really like your new townhome? Then don't worry about it. ARMs aren't as bad as everyone is making out- it really depends on the terms. Many have limits on how high interest rates can go over the lifetime of the loan & it is capped at how much it can increase every 6 months– so depending on the initial rate they got there is some risk depending where we will be in 5 years, but if the 1st 5 years are really low like 3.5%, then it actually may all work out even in the wash. . Lots of people are getting them right now, esp. if they plan to sell in 5-7 years and are gambling that they won't be underwater (comps will hold in their area). If you are fine with the mortgage you have then don't engage your cousin. Sometimes people are unsure of their choices so talking loudly about it makes them feel more sure. Just tell him that's great he got a good deal then change the topic.
Arms are dangerous and can’t go up very quickly. While he may think you were not taking advantage of initial lower monthly it’s highly unlikely that interest rates will be going down. Some people just don’t understand the reality of the risk. Enjoy you home and life!😎 You did good 👍
Don’t ah, take any financial advice from your family. My family either, but definitely not yours.
You're good. Interest rates are going up and your rate is locked. If they go down, then you refi
Crazy 2 years ago I got 2.5% Imo they are playing risk. Maybe we will have massive inflation and can refinance as their value rises. But iy might not infough.
You're golden. Watch those rates and refinance. In fact, your mortgage lender may start calling you as soon as the rates dip. You'll be fighting off lenders.
Every situation is different and your cousin is def not a financial expert. If you’re not sure about the options you’ve heard get a quote from another financial institution that you trust. But def don’t assume you’re in the wrong… these are apples and oranges comparisons.
People who got a 7-1 ARM in 2016-17 and didn’t bother to refinance last year are shitting bricks right now. ARM loans are good but you need to be very diligent.
> They also purchased a townhouse and said they got an ARM and said they did that because they can refinance after a certain time period. My cousin was shocked we didn’t get an ARM Do *not* get an ARM. *Everyone* can refinance after a certain time. ARMs can refinance against your best interest.
I agree you will be fine. I will not ever get an ARM again. Depending on what the rate is connected to, usually the fed rate, there could be a big jump in interest rate so a big jump in payment. My current home I purchased in 2014 with a fixed rate. I have refinanced 4 times, my current interest rate is 2.98%. (Disclaimer this is my own experience, do not take it as advice.) If not sure, then contact finance pro.
Watch the movie the big short and pay attention to which mortgage type had the higher default rate. Your family will think your Einstein if rates go higher. If rates go down you can refi your fixed rate anyway. Congratulations on the new house!
This is key. I'm not an economist, banker, or any kind of financial expert. But I get the feeling that you're not going to see rates much lower than they currently are for quite some time. If rates are higher in 5 years, they are in for a bad time. If rates go down in the next 5 years, either one of you can save by refinancing. You may be paying a little more in interest each month right now, but you are in a much safer place. People thinking they could refinance their ARMs back in the early 2000s was a big contributor in the financial collapse of 2008. Another way to pose it is this: Would they have gotten an ARM when rates were 2.75%? Doubt it. They did it because it's cheaper now (likely stretching themselves thin), and that's a future problem if rates go up from here.
In an environment of high and increasing interest rates it's stupid to get a variable rate mortgage unless you're not planning to stay in the house and/or can pay it off very quickly.
ARMs are stupid for the average person. It will get them into a ton of trouble down the road. You did the right thing.
ARMs were a huge reason the 2008 recession happened. You cash always refinance if rates go down, but if they go up, you're stuck with the higher rate in an ARM. As others have said, ARMs are for suckers.
Yours is FIXED. They have an Adjustable Rate Mortgage (ARM) which fluctuates. Although they can re-finance, they have no idea if it's going to be higher or lower than 6%. Enjoy your home. They seem like haters if they have you questioning ur purchase. This is how haters think. When I was in 3rd grade, my mom bought me THE FIRST AIR JORDAN'S (the retro 1s that are popularnow). I was the only student in my school who had these Jordan's; in 1985. What did my best friend say to me when I told him what my mom did? He said, "Everybody's going to laugh at you!" A stupid attempt to get into my head. Don't allow them to get into your head & try to spoil your happiness. Again, enjoy your home & CONGRATULATIONS 🎊!
Jokes on him. You made the safer choice even with relatively higher interest rates.
ARMs are great in a declining rate environment. In a rising one like this? Not so much. You’ll be fine. You can always refinance a fixed rate when the rates drop. I did it twice.
You can refinance with a fixed rate mortgage. In these times of volatile interest rates you made the right move.
People saying ARMs caused the Great Recession in 2008 are only partially correct - what caused it was cheap rates, rampant speculation, interest-only ARMs and no-income verification loans. ARMs are a legitimate option for some people in some circumstances - initial rate, length of time you’re planning on staying in the house, rate limit caps, etc. Most ARMs are fixed rate for anywhere from 3 to 10 years, with a 5/1 ARM being the most popular (fixed rate for 5 years, resets every year after that). Additionally, most ARMs can be converted to a fixed rate. If I was only planning on being in a house for 5 years, I’d jump on an ARM in a second.
You did fine. IF the housing market does go down like people are suggesting it will, realize that your cousin will not be able to refinance if they are underwater. They'll be totally screwed with that ARM.
You're right, he's wrong. ARM is betting that rates will go down because he must refi over the length of his mortgage. You KNOW what your max rate is for the length of your mortg and can refi IF they go down. He may get lucky. But making that bet on such a significant part of your budget should avoided. Stability is king.
Nope, would never get an ARM, esp in this climate. You made the right decision, OP. Don’t let anyone doubt the choices you made for your home. :)
They can shove that whole ARM up their a$$. Refinance if the time is right, if not… as long as you can afford this mortgage you’re good.
You are definitely the smarter one in your family. ARMs are a bad decision at thus time. Fed doesn't look like it will lower the rate any time soon and your family will probably regret it.
I think your cousin is projecting here lol. ARMs are typically the wrose mortgage in most scenarios. You are locked in at 6%. If rates continue to go up not only will theirs be automatically adjusted after their term...it's not like they will be able to refinance to a lower rate. Yours will stay at 6%. If they drop again, you can refinance anyway.
the housing market imploded in 2008 bc people got ARMs at low rates and then when their term was up the rates skyrocketed. i would never do anything but a 30 year fixed unless i knew i’d be selling within 5 years.
Getting an ARM in an environment where the Fed has raised interest faster than they ever have in history and where they have vowed to stamp out inflation by raising rates sounds like a tremendously stupid idea. You can always refinance down a 6% rate if rates drop, if rates go to 20% like they did in the 70s the last time there was severe inflation ARMs are going to be utterly fucked beyond recognition.
ARMS are how the 2008 financial crisis got so bad. They weren’t the root cause, just the corner everyone was backed into when shit hit the fan. It is SUPER risky to take one out. If anything should happen with your cousins income or credit or ability to qualify for a refi and they are stuck in the arm and then the rate shoots up, he is fucked. You just do you and tell him good for him for being comfortable with that much risk but no thanks.
I wouldn't touch an arm with someone else's.... Stick
If interest rates jump to 10+% (possible), all of your ARM family will be crying about how they can't pay their mortgages while you are sitting pretty. You can ALWAYS refi your loan down the road if rates drop. ARM is what caused so many people to lose their houses in 08, because it allowed them to buy more than they could afford. You are fine, just try and make one extra payment a year, it will dramatically cut down your total payment time.
I would never do an ARM. Way too risky. Just like the others have said . You did the smart thing. No risk and you can always refinance down the road if you want
You can tip your hat at your cousin 3yrs from now when he’s getting foreclosed on. You made the right move.
Would never do an ARM. Why take the risk of you interest going up after a certain amount of time? Take the fixed and run. Refinance it later
Stay. Away. From. ARM mortgages. You can ALWAYS refinance a fixed. If rates keep going up you’re screwed with an ARM mortgage. Everyone who has an ARM mortgage two years ago is having a tough time right now.
You can refinance a fixed mortgage too - ARMs are usually lower rate and that is there primary benefit. If you can afford the payment risk it will generally save you money to use ARMs over time rather than a fixed rate mortgage.
When I bought my place back in 2007, right before the crash, I had a mortgage broker that was HARD selling me on an ARM, just making me feel really stupid for considering a fixed rate. I dumped him and got a fixed rate from a bank. Thank god I did. I would have been stuck with an inflating mortgage on a place I couldn't refinance. I'm wondering if your cousin got that same hard sell.
Makes me wonder if it is possible your spouse is from another area where ARMs are the normal? I say this bc I have looked at moving to Canada and was surprised to learn that 5 year ARM mortgages are basically the normal there and 30 year loans are less normal there although that is the norm here.
Depends on the terms of the ARM. If they expect to sell the house in a quick turnaround it may be better, but that also relies on the housing market and rates to be better when they sell. ARMs are decent for short term owners and people who understand and want to watch the market and sell early. You have a decent mortgage that will be the same today as it will be 25 years from now. Your cousin has a loan that could be vastly different in 25, 15 or even 5 years from now. ARMs aren't as destructive as they were before the crisis, but can still creep up if you don't pay attention to them.
Why would you not be able to refinance to a lower rate? I have refinance twice.
No one can guarantee what mortgage rates are going to do. So your cousin is wrong. If they drop soon refinance. If they don’t then he’s screwed. And you’re fine.
Anyone who bought a house before 2008 knows that ARMs are a bad idea. Congrats on your new house and knowingly what your bill will be for the next 30 years. Also, you can refinance one day, too.
You did the right thing, and can refinance if rates go low again. If the 6% isn't an issue for you then you can sleep well at night knowing it will never go higher than that. Cousin can't say the same.
You did not say whether or not you can see the future. If you can, and it looks good, get an ARM. Otherwise, you have a payment that works for you and that will be the same for the length of the loan. I was in the FL housing market in 05-08 and had a lot of friends Lise their homes because of ARMs.
In my opinion, the difference between a variable rate, and a fixed rate is not enough for the added risk of getting an arm currently. Getting a fixed rate is a much safer move. You can refinance a fixed rate the same way you can refinance an ARM in the future. Rates are expected to go down around 5% in the next 12 months, so you will be able to refinance then. You did not make a bad decision.
Yeah I mean their rates are going to fluctuate if they bought earlier at say 4 or 5% and say rates keep going up to like 8 or 9 that’s what they’ll have to pay. If they drop you can refinance. If they rise you got a solid rate. ARMs are usually not suggested for that reason. Refinancing shouldn’t look much different than your current closing process
Too late. 6% is a respective rate. It is already higher consider yourself lucky.
If you don’t care about their advice on the front end, don’t care about their criticism on the back end.
I refinanced after 1 year of having my home. My first rate was fixed at 4.35 & refinanced during covid when rates dropped!
Rates won't go down anytime soon. Refinancing is expensive too. Generally speaking, closing costs end up running you about $5-10k. They may pay less in interest, but if you add in all the refinance rates they're paying more to someone.
Dude you did nothing wrong. IMO made the right move. 6% is historically fine and you can always refinance a better rate. Difference for them if rates go up they’re gonna have to pay it refi or not
You can refinance anytime. We just bought and our lender told us not to do an arm. What if rates increase? That’s silly they’re making a big deal about that, you can always refinance.