What I Learned From Getting an Adjustable Rate Mortgage

While I was growing up, most of the financial advice I received related to home buying was one sentence: never get an adjustable rate mortgage. Sometimes people would explain why they felt they were a bad idea, and sometimes they would just expect me to trust their information and instinctively avoid them. I’ve always been the kind of person who needed the explanation in order to heed the advice, and typically, I also prefer to verify the information myself. Trust but verify. Have I heard that somewhere before?

So when it came time for me to buy my first property, and I found myself looking into mortgage options, I spoke with several banks who all offered me multiple loan options. In most cases, one was an adjustable rate and one was a fixed rate. At this point, I thought to myself, adjustable rate mortgages are supposed to be bad, that’s all I’ve ever been told, so I should probably pick the fixed rate, but let me do a little thinking for myself before I decide.

The property I ended up buying required a non-conforming loan, so one of the banks would not give me loan upon finding this out. Once I had decided on the bank I would use, the first thing I looked at were the terms of the two options side by side. Both loans were 30 year terms, so the monthly payments were similar. The fixed rate option was .5% higher interest, so over the life of the loan, I would pay thousands more in interest, all other things being equal.

The adjustable rate option was fixed for the first 10 years, and then adjustable the remaining 20 years. What people typically worry about with adjustable rate mortgages is that you start out with a good interest rate and then once the rate becomes adjustable, it skyrockets and your monthly bill doubles. This is why it’s important to read the terms carefully. Without getting into the nitty gritty of the terms in my particular situation, the potential increase was very small and there was a cap on how much the rate could increase annually.

I did the math and the interest rate would have to max out every year for 5 years in a row before my monthly payment doubled. Now, that’s not to say that increases less than doubling are good, I’m simply saying that when people suggest that the rate could double overnight, that isn’t typical of adjustable rate mortgage terms.

If I were in a situation where the rate was increasing steadily, I could also always choose to refinance, although, if the adjustable rate mortgage is increasing steadily, it is likely that options to refinance would offer similar rates at that time. One calculation you could do is how much you would save in interest payments over the fixed portion of the adjustable rate versus the same period of time on the fixed rate loan. If the amount saved is more than what it would cost to refinance, then you could at least consider it as an option.

The last thing to consider when thinking about fixed versus adjustable rate mortgages is how long you will own the property. If you are buying your forever home and plan to live there for decades to come, then a fixed rate mortgage might cause you less hassle down the road. For me, I was buying my first property, a 1 bedroom condo in the city that I knew I would outgrow in 5 or 6 years. Since the adjustable rate mortgage I was looking at was fixed for the first 10 years, I doubted I would still own the property by the time the fixed portion ended. Sure enough, 5 years almost to the day, I was passing papers on that property and moving on to the next.

Certainly there are cases where an adjustable rate mortgage doesn’t make sense, and as always it’s important to read the terms and conditions of any loan carefully, but I hope my experience has given you some ideas to consider the next time you are mortgage shopping.

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