Why You Took an Adjustable Rate Mortgage?

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
Locked
Shikoku
Posts: 270
Joined: Fri Oct 27, 2017 11:01 pm
Location: USA

Why You Took an Adjustable Rate Mortgage?

Post by Shikoku » Sun Dec 17, 2017 8:51 pm

At present I have an adjustable rate mortgage (ARM). It is actually an interest-only ARM which keeps my mortgage payment pretty low. This allows me to maximize my tax-sheltered retirement contributions while satisfying my other financial obligations. I have $300K home equity and $200K mortgage. In 2017, I am making $6.5K in mortgage payment which is 4.70% of my gross employment income.

I was told that my having an ARM is one of the indications that I lack strong foundation or understanding in financial management. Have you ever took an ARM? If so, why?
"I don't worry too much about pointing fingers at the past. I operate on the theory that every saint has a past, every sinner has a future." -- Warren Buffett

User avatar
Halfvolley
Posts: 15
Joined: Wed Aug 03, 2016 6:41 am

Re: Why You Took an Adjustable Rate Mortgage?

Post by Halfvolley » Sun Dec 17, 2017 8:56 pm

I took a Penfed 5/5 30 year ARM at 2.75%

Reasons:
- 0 closing costs
- Breakeven of ~10 years compared to a 30 year fixed
- I planned to move in less than 10 years

I ended up selling the place a year or so before the rate adjusted.

johnbarry
Posts: 23
Joined: Sun Dec 17, 2017 9:01 pm

Re: Why You Took an Adjustable Rate Mortgage?

Post by johnbarry » Sun Dec 17, 2017 9:29 pm

Almost certain to move in 6 years, so got a 7-1 ARM, 500k mortgage for the lower rate (was 0.25% lower than a 15 year fixed).
In the remote probability that we stay, I am on track to pay off the mortgage within 8 years and the balance outstanding after year 7 would be low enough where I'd still be ahead (since the rate can only increase by 2% in that year).

Lacrocious
Posts: 313
Joined: Thu Mar 22, 2007 9:45 pm
Location: Wisconsin

Re: Why You Took an Adjustable Rate Mortgage?

Post by Lacrocious » Sun Dec 17, 2017 10:15 pm

Also a PenFed 5/5 30 year arm at 2.5%. I agree, with Halfvolley, the break-even of the PenFed ARM at the worst case scenario of 2% increases each 5 year period, up to the max of 5% increase was close to 14 years over the then current 30 year fixed. We are 4.3 years into the ARM. While our initially planned ~5 year stay is extending to maybe 9 years - we are still years away from break-even, and that is only if we get the max increase at year 5 & 10. Also, we could choose to pay it off at a cost of capital gains at some point in the future due to any number of reasons (retiring, tax law deduction changes, etc.).

I don't think having an ARM is a "By Definition" indication of lack of understanding financial related topics. If you have an ARM because it was the only way you could afford the house and the payments are a stretch anyway, that could be an indication. Understanding the terms of the ARM as well as your plans for paying it off and/or moving and understanding the risk of the ARM vs. fixed rate mortgage makes it a perfectly acceptable decision in my mind. Like most things financial, there is a risk and a reward that needs to be understood.
- L

Bacchus01
Posts: 1744
Joined: Mon Dec 24, 2012 9:35 pm

Re: Why You Took an Adjustable Rate Mortgage?

Post by Bacchus01 » Sun Dec 17, 2017 10:22 pm

Shikoku wrote:
Sun Dec 17, 2017 8:51 pm
At present I have an adjustable rate mortgage (ARM). It is actually an interest-only ARM which keeps my mortgage payment pretty low. This allows me to maximize my tax-sheltered retirement contributions while satisfying my other financial obligations. I have $300K home equity and $200K mortgage. In 2017, I am making $6.5K in mortgage payment which is 4.70% of my gross employment income.

I was told that my having an ARM is one of the indications that I lack strong foundation or understanding in financial management. Have you ever took an ARM? If so, why?
Wow, I can't believe someone told you that. Without understanding the situation or the context at all, I'd suggest never taking advice from said person again.

I have had them many times. I've even had an interest-only loan. Why? I got an interest-only loan back in 2004. I was moving to a HCOL area and my employer was subsidizing 75% of my interest payment. By getting a then very good 4% interest only rate, my employer was paying 75% of it, or 3%. I had no intention of staying at the location more than 3-4 years. As it happened, we moved in 2 years. We also had a buy-out clause in our relo package that insured we would get 100% of our original purchase price on our house. We lived in a $750K house and paid just $500/month on our mortgage, plus $400/month in taxes. All deductible. And we have a near guarantee of not losing money on the house. Was it risky? A little. But it worked out very, very well.

Any other time we've taken an ARM almost exclusively because the spread between a 5/1 ARM and a 30-year fixed was pretty large. Earlier this year our latest 5/1 was about to reset. When I looked at the spread between a 5/1 and a 30 to refinance, it was so close that we just went ahead and locked into a fixed rate. And the spread between the 15 and 30 was also so far away that we just locked into a 15 year fixed. We have 3 properties now, 2 of them are on 15 year fixed at 2.25% and 3.0% and one is on a 20-year fixed at 2.75%.

I'd say it depends on your situation.

DrGoogle2017
Posts: 1322
Joined: Mon Aug 14, 2017 12:31 pm

Re: Why You Took an Adjustable Rate Mortgage?

Post by DrGoogle2017 » Sun Dec 17, 2017 11:02 pm

Bacchus01 wrote:
Sun Dec 17, 2017 10:22 pm
Shikoku wrote:
Sun Dec 17, 2017 8:51 pm
At present I have an adjustable rate mortgage (ARM). It is actually an interest-only ARM which keeps my mortgage payment pretty low. This allows me to maximize my tax-sheltered retirement contributions while satisfying my other financial obligations. I have $300K home equity and $200K mortgage. In 2017, I am making $6.5K in mortgage payment which is 4.70% of my gross employment income.

I was told that my having an ARM is one of the indications that I lack strong foundation or understanding in financial management. Have you ever took an ARM? If so, why?
Wow, I can't believe someone told you that. Without understanding the situation or the context at all, I'd suggest never taking advice from said person again.

I have had them many times. I've even had an interest-only loan. Why? I got an interest-only loan back in 2004. I was moving to a HCOL area and my employer was subsidizing 75% of my interest payment. By getting a then very good 4% interest only rate, my employer was paying 75% of it, or 3%. I had no intention of staying at the location more than 3-4 years. As it happened, we moved in 2 years. We also had a buy-out clause in our relo package that insured we would get 100% of our original purchase price on our house. We lived in a $750K house and paid just $500/month on our mortgage, plus $400/month in taxes. All deductible. And we have a near guarantee of not losing money on the house. Was it risky? A little. But it worked out very, very well.

Any other time we've taken an ARM almost exclusively because the spread between a 5/1 ARM and a 30-year fixed was pretty large. Earlier this year our latest 5/1 was about to reset. When I looked at the spread between a 5/1 and a 30 to refinance, it was so close that we just went ahead and locked into a fixed rate. And the spread between the 15 and 30 was also so far away that we just locked into a 15 year fixed. We have 3 properties now, 2 of them are on 15 year fixed at 2.25% and 3.0% and one is on a 20-year fixed at 2.75%.

I'd say it depends on your situation.
I made that comment because of her situation in her post. Unlike you, she has no plan on moving, the interest is not paid by her employer, she may not have money outside of her retirement to pay off her mortgage, plus she used the cash out money from her loan to invest in the stock market at an all time high, yet she takes offense in my comment as if I belittle her. Not only that, she didn’t have a roadmap of what to do with her mortgage. In one sentence, she said she started out with buying a house only when she could pay with only cash, then she swung over to interest only ARM. It’s like going from super conservative to super risky.
This morning she made a specific thread attacking me, which were closed. And now she starts another thread. Goodness OP, how petty can you be? I hope this thread gets closed too.

OP, I have every intention of staying out of your thread, but I’ll post a link from motleyfool why it’s not a good idea. Next time, if you can’t take comment from the internet, don’t post asking question. Read the first line from the motley fool, only interest ARM was the major cause for the last housing bubble.

https://www.fool.com/mortgages/2017/10/ ... -idea.aspx
Last edited by DrGoogle2017 on Mon Dec 18, 2017 1:11 am, edited 7 times in total.

User avatar
whodidntante
Posts: 3709
Joined: Thu Jan 21, 2016 11:11 pm

Re: Why You Took an Adjustable Rate Mortgage?

Post by whodidntante » Sun Dec 17, 2017 11:10 pm

I've considered it since I keep my mortgage as leverage for my stock investments. But the overriding factor is that I have a great rate on a 15-year.

cmeretire
Posts: 20
Joined: Thu Nov 24, 2016 11:45 am

Re: Why You Took an Adjustable Rate Mortgage?

Post by cmeretire » Sun Dec 17, 2017 11:20 pm

Another PenFed 5/5 30yr mortgage here @ 2.65%, 3 years left before the next adjustment. I plan to move though in less than 2 years but in general in addition to what others have already stated, it lowered my monthly interest outlay and payment. It will be a net win for me by the time I move, even it I didn't plan on moving in the next 2 years it was a good move for me with 0 closing costs associated with the loan when I took it.

I don't know that I would personally take a interest only ARM but that being said, it sounds like you are in a solid position on your home and made the choice you did for a very solid reason, so you could increase your investments / savings.

Bacchus01
Posts: 1744
Joined: Mon Dec 24, 2012 9:35 pm

Re: Why You Took an Adjustable Rate Mortgage?

Post by Bacchus01 » Sun Dec 17, 2017 11:30 pm

DrGoogle2017 wrote:
Sun Dec 17, 2017 11:02 pm
Bacchus01 wrote:
Sun Dec 17, 2017 10:22 pm
Shikoku wrote:
Sun Dec 17, 2017 8:51 pm
At present I have an adjustable rate mortgage (ARM). It is actually an interest-only ARM which keeps my mortgage payment pretty low. This allows me to maximize my tax-sheltered retirement contributions while satisfying my other financial obligations. I have $300K home equity and $200K mortgage. In 2017, I am making $6.5K in mortgage payment which is 4.70% of my gross employment income.

I was told that my having an ARM is one of the indications that I lack strong foundation or understanding in financial management. Have you ever took an ARM? If so, why?
Wow, I can't believe someone told you that. Without understanding the situation or the context at all, I'd suggest never taking advice from said person again.

I have had them many times. I've even had an interest-only loan. Why? I got an interest-only loan back in 2004. I was moving to a HCOL area and my employer was subsidizing 75% of my interest payment. By getting a then very good 4% interest only rate, my employer was paying 75% of it, or 3%. I had no intention of staying at the location more than 3-4 years. As it happened, we moved in 2 years. We also had a buy-out clause in our relo package that insured we would get 100% of our original purchase price on our house. We lived in a $750K house and paid just $500/month on our mortgage, plus $400/month in taxes. All deductible. And we have a near guarantee of not losing money on the house. Was it risky? A little. But it worked out very, very well.

Any other time we've taken an ARM almost exclusively because the spread between a 5/1 ARM and a 30-year fixed was pretty large. Earlier this year our latest 5/1 was about to reset. When I looked at the spread between a 5/1 and a 30 to refinance, it was so close that we just went ahead and locked into a fixed rate. And the spread between the 15 and 30 was also so far away that we just locked into a 15 year fixed. We have 3 properties now, 2 of them are on 15 year fixed at 2.25% and 3.0% and one is on a 20-year fixed at 2.75%.

I'd say it depends on your situation.
I made that comment because of her situation in her post. Unlike you, she has no plan on moving, the interest is not paid by her employer, she may not have money outside of her retirement to pay off her mortgage, plus she used the cash out money from her loan to invest in the stock market at an all time high, yet she takes offense in my comment as if I belittle her. Not only that, she didn’t have a roadmap of what to do with her mortgage. In one sentence, she said she started out with buying a house only when she could pay with only cash, then she swung over to interest only ARM. It’s like going from super conservative to super risky.
This morning she made a specific thread attacking me, which were closed. And now she starts another thread. Goodness OP, how petty can you be? I hope this thread gets closed too.

OP, I have every intention of staying out of your thread, but I’ll post a link from motleyfool why it’s not a good idea. Next time, if you can take comment from the internet, don’t post asking question. Read the first line from the motley fool, only interest ARM was the major cause for the last housing bubble.

https://www.fool.com/mortgages/2017/10/ ... -idea.aspx
Ah, thanks.

BTW, I think that headline in that article, or the first sentence I should say, is in fact false.

DrGoogle2017
Posts: 1322
Joined: Mon Aug 14, 2017 12:31 pm

Re: Why You Took an Adjustable Rate Mortgage?

Post by DrGoogle2017 » Sun Dec 17, 2017 11:35 pm

Bacchus01 wrote:
Sun Dec 17, 2017 11:30 pm
DrGoogle2017 wrote:
Sun Dec 17, 2017 11:02 pm
Bacchus01 wrote:
Sun Dec 17, 2017 10:22 pm
Shikoku wrote:
Sun Dec 17, 2017 8:51 pm
At present I have an adjustable rate mortgage (ARM). It is actually an interest-only ARM which keeps my mortgage payment pretty low. This allows me to maximize my tax-sheltered retirement contributions while satisfying my other financial obligations. I have $300K home equity and $200K mortgage. In 2017, I am making $6.5K in mortgage payment which is 4.70% of my gross employment income.

I was told that my having an ARM is one of the indications that I lack strong foundation or understanding in financial management. Have you ever took an ARM? If so, why?
Wow, I can't believe someone told you that. Without understanding the situation or the context at all, I'd suggest never taking advice from said person again.

I have had them many times. I've even had an interest-only loan. Why? I got an interest-only loan back in 2004. I was moving to a HCOL area and my employer was subsidizing 75% of my interest payment. By getting a then very good 4% interest only rate, my employer was paying 75% of it, or 3%. I had no intention of staying at the location more than 3-4 years. As it happened, we moved in 2 years. We also had a buy-out clause in our relo package that insured we would get 100% of our original purchase price on our house. We lived in a $750K house and paid just $500/month on our mortgage, plus $400/month in taxes. All deductible. And we have a near guarantee of not losing money on the house. Was it risky? A little. But it worked out very, very well.

Any other time we've taken an ARM almost exclusively because the spread between a 5/1 ARM and a 30-year fixed was pretty large. Earlier this year our latest 5/1 was about to reset. When I looked at the spread between a 5/1 and a 30 to refinance, it was so close that we just went ahead and locked into a fixed rate. And the spread between the 15 and 30 was also so far away that we just locked into a 15 year fixed. We have 3 properties now, 2 of them are on 15 year fixed at 2.25% and 3.0% and one is on a 20-year fixed at 2.75%.

I'd say it depends on your situation.
I made that comment because of her situation in her post. Unlike you, she has no plan on moving, the interest is not paid by her employer, she may not have money outside of her retirement to pay off her mortgage, plus she used the cash out money from her loan to invest in the stock market at an all time high, yet she takes offense in my comment as if I belittle her. Not only that, she didn’t have a roadmap of what to do with her mortgage. In one sentence, she said she started out with buying a house only when she could pay with only cash, then she swung over to interest only ARM. It’s like going from super conservative to super risky.
This morning she made a specific thread attacking me, which were closed. And now she starts another thread. Goodness OP, how petty can you be? I hope this thread gets closed too.

OP, I have every intention of staying out of your thread, but I’ll post a link from motleyfool why it’s not a good idea. Next time, if you can take comment from the internet, don’t post asking question. Read the first line from the motley fool, only interest ARM was the major cause for the last housing bubble.

https://www.fool.com/mortgages/2017/10/ ... -idea.aspx
Ah, thanks.

BTW, I think that headline in that article, or the first sentence I should say, is in fact false.
I don’t know about that. Googling for that first sentence and a bunch of stuff comes up with similar sentiment. Here is one.
https://www.cbsnews.com/news/adjustable ... -comeback/

User avatar
White Coat Investor
Posts: 13329
Joined: Fri Mar 02, 2007 9:11 pm
Location: Greatest Snow On Earth

Re: Why You Took an Adjustable Rate Mortgage?

Post by White Coat Investor » Sun Dec 17, 2017 11:36 pm

Shikoku wrote:
Sun Dec 17, 2017 8:51 pm
At present I have an adjustable rate mortgage (ARM). It is actually an interest-only ARM which keeps my mortgage payment pretty low. This allows me to maximize my tax-sheltered retirement contributions while satisfying my other financial obligations. I have $300K home equity and $200K mortgage. In 2017, I am making $6.5K in mortgage payment which is 4.70% of my gross employment income.

I was told that my having an ARM is one of the indications that I lack strong foundation or understanding in financial management. Have you ever took an ARM? If so, why?
Nonsense. It just means you could afford to self-insure against interest rate risk.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course

Bacchus01
Posts: 1744
Joined: Mon Dec 24, 2012 9:35 pm

Re: Why You Took an Adjustable Rate Mortgage?

Post by Bacchus01 » Sun Dec 17, 2017 11:39 pm

DrGoogle2017 wrote:
Sun Dec 17, 2017 11:35 pm

I don’t know about that. Googling for that first sentence and a bunch of stuff comes up with similar sentiment. Here is one.
https://www.cbsnews.com/news/adjustable ... -comeback/
I understand that there is conjecture out there that it was one of the causes, I just think it was a SMALL input. The instrument itself was not really the problem, the problem was the low qualification requirements, government policy on required lending by Fannie/Freddie and the bundling of loans into new tools that the risk was not transparent and appropriately valued.

I don't think the tools themselves (ARMs, interest only, etc.) are bad and I think they are really good tools for some when used appropriately.

DrGoogle2017
Posts: 1322
Joined: Mon Aug 14, 2017 12:31 pm

Re: Why You Took an Adjustable Rate Mortgage?

Post by DrGoogle2017 » Sun Dec 17, 2017 11:42 pm

Bacchus01 wrote:
Sun Dec 17, 2017 11:39 pm
DrGoogle2017 wrote:
Sun Dec 17, 2017 11:35 pm

I don’t know about that. Googling for that first sentence and a bunch of stuff comes up with similar sentiment. Here is one.
https://www.cbsnews.com/news/adjustable ... -comeback/
I understand that there is conjecture out there that it was one of the causes, I just think it was a SMALL input. The instrument itself was not really the problem, the problem was the low qualification requirements, government policy on required lending by Fannie/Freddie and the bundling of loans into new tools that the risk was not transparent and appropriately valued.

I don't think the tools themselves (ARMs, interest only, etc.) are bad and I think they are really good tools for some when used appropriately.
Most people get ARMs because they probably can’t qualify for 30 year mortgage. I know there are exceptions, but I think it’s already implied that they have low qualifications. That’s why there are no closing costs.

alex_686
Posts: 3652
Joined: Mon Feb 09, 2015 2:39 pm

Re: Why You Took an Adjustable Rate Mortgage?

Post by alex_686 » Sun Dec 17, 2017 11:53 pm

2 points.

There was a Fed study back before the 2008 crisis. Covered 20 years of real world mortgages. 9 times out of 10 people did better by going the adjustable rate mortgage. Adjustable rate mortgages have a lower initial rate and over the life of the loan you win with that lower rate. It is a risk that rates will spike. Convention says to go with the lower risk fixed rate mortgage but not that you "lack strong foundation or understanding in financial management".

The interest only part is a different game. In theory this would work very well for a highly discipline investor who had the ability and willingness to take a high level of risk. For this to work you must take the principle payments you would have made and successfully invest them in a bull market. The problem is that interest only products are not sold to highly discipline investors who have the ability to take risk. 2008 was very nasty. Even a slow down in housing prices can be a issue. The road is littered with failures.

veindoc
Posts: 358
Joined: Sun Aug 14, 2016 9:04 pm

Re: Why You Took an Adjustable Rate Mortgage?

Post by veindoc » Sun Dec 17, 2017 11:55 pm

Interest only is a separate entity than ARM’s.

We went with an ARM because it was the lowest interest rate and a high priority of ours is/was to pay the mortgage. We had one for 5 years starting in 2011,re-locked in 2016. By 2021 we should be mortgage free.

HornedToad
Posts: 851
Joined: Wed May 21, 2008 12:36 am

Re: Why You Took an Adjustable Rate Mortgage?

Post by HornedToad » Mon Dec 18, 2017 12:23 am

veindoc wrote:
Sun Dec 17, 2017 11:55 pm
Interest only is a separate entity than ARM’s.

We went with an ARM because it was the lowest interest rate and a high priority of ours is/was to pay the mortgage. We had one for 5 years starting in 2011,re-locked in 2016. By 2021 we should be mortgage free.
Agree with this assessment.

We did a 7 year ARM with a townhouse since it was ~3/8 to 1/2 percent lower than 30 year FRM and we were planning on moving in ~5 years. We paid the mortgage like a 30 year FRM rate so the ARM allowed the extra payments to go to principal. The breakeven was around 9-10 years vs. 30 year FRM.

We ended up both refinancing and moving after 3.5 years so would have been better with 5 year ARM instead overall.

In our new house I didn't have a definitive timeline of when we were moving and so went with the 30 year FRM to lock in the mortgage.

I do agree if you have an Interest only mortgage and don't have a specific reason for it, or you are using it to invest in the stock market then that's poor financial knowledge/discipline and is far more risky than I would be comfortable with.

DrGoogle2017
Posts: 1322
Joined: Mon Aug 14, 2017 12:31 pm

Re: Why You Took an Adjustable Rate Mortgage?

Post by DrGoogle2017 » Mon Dec 18, 2017 12:25 am

alex_686 wrote:
Sun Dec 17, 2017 11:53 pm
2 points.

There was a Fed study back before the 2008 crisis. Covered 20 years of real world mortgages. 9 times out of 10 people did better by going the adjustable rate mortgage. Adjustable rate mortgages have a lower initial rate and over the life of the loan you win with that lower rate. It is a risk that rates will spike. Convention says to go with the lower risk fixed rate mortgage but not that you "lack strong foundation or understanding in financial management".

The interest only part is a different game. In theory this would work very well for a highly discipline investor who had the ability and willingness to take a high level of risk. For this to work you must take the principle payments you would have made and successfully invest them in a bull market. The problem is that interest only products are not sold to highly discipline investors who have the ability to take risk. 2008 was very nasty. Even a slow down in housing prices can be a issue. The road is littered with failures.
I was avoiding the word clueless, I thought that word would belittling her. Little did I know.
However, had she wrote she was initially wanted an ARM mortgage, I wouldn’t come out so strong. I thought it was a bit bipolar investing to swing from super conservative to super risky.

Ragnoth
Posts: 141
Joined: Sat Sep 17, 2016 8:10 am

Re: Why You Took an Adjustable Rate Mortgage?

Post by Ragnoth » Mon Dec 18, 2017 1:12 am

Lacrocious wrote:
Sun Dec 17, 2017 10:15 pm
If you have an ARM because it was the only way you could afford the house and the payments are a stretch anyway, that could be an indication. Understanding the terms of the ARM as well as your plans for paying it off and/or moving and understanding the risk of the ARM vs. fixed rate mortgage makes it a perfectly acceptable decision in my mind.
This is the issue right here.

For the average non-Boglehead consumer, an ARM is a red flag that you couldn't qualify for a conventional mortgage, and you likely have bad credit and are indebted to the hilt.

In general, keep in mind that you may not be the target audience for simplistic financial advice. It assumes a person with a certain temperament and level of understanding.

For example, some advisor might say "people are financially irresponsible if they carry a credit card balance." That is true for the *average* consumer, but if you are clever enough to understand the edge cases (e.g., somebody took a 0 APR cash advance and rolled the proceeds into a CD to make a small guaranteed return), chances are the advice is not for you.

DrGoogle2017
Posts: 1322
Joined: Mon Aug 14, 2017 12:31 pm

Re: Why You Took an Adjustable Rate Mortgage?

Post by DrGoogle2017 » Mon Dec 18, 2017 1:37 am

What edge case are you referring to? Anytime some banks send me a 0 APR cash advance, there is always small writing stating I will be paying 3% cash advance. Not only that in the last few years, it’s very hard to get a 3% CD on a 5 year term. So I don’t see the advantage. Plus these 0 APR is only for short term, much less than 1 year to 18 months. You will end up losing money in the end period.

Ragnoth
Posts: 141
Joined: Sat Sep 17, 2016 8:10 am

Re: Why You Took an Adjustable Rate Mortgage?

Post by Ragnoth » Mon Dec 18, 2017 3:29 am

DrGoogle2017 wrote:
Mon Dec 18, 2017 1:37 am
What edge case are you referring to? Anytime some banks send me a 0 APR cash advance, there is always small writing stating I will be paying 3% cash advance. Not only that in the last few years, it’s very hard to get a 3% CD on a 5 year term. So I don’t see the advantage. Plus these 0 APR is only for short term, much less than 1 year to 18 months. You will end up losing money in the end period.
It was meant to be more of a general suggestion that every piece of "good advice" has limits.

I'll admit I'm not familiar with the ins and outs of cash advances (or the fact there is a 3% hit), and could have chosen a better example. :oops:

That said, given the lengths some people go to with manufactured spending and rewards programs, I'm sure somebody has made a free dollar somewhere by carrying around a balance. Who knows? Maybe a cash-strapped grad student takes out a $5k cash advance at 0 APR, puts the proceeds in a checking account, and uses it to make the direct deposits needed to sustain a 6.00% money market account at Mango.

It might be silly for other reasons (e.g., a whole lot of effort juggling balances to make $50-100), but I'll stand by the idea that you can take conventional wisdom with a grain of salt if you are able to think through the consequences and figure out a way to come out ahead.

User avatar
Watty
Posts: 13463
Joined: Wed Oct 10, 2007 3:55 pm

Re: Why You Took an Adjustable Rate Mortgage?

Post by Watty » Mon Dec 18, 2017 5:55 am

Shikoku wrote:
Sun Dec 17, 2017 8:51 pm
This allows me to maximize my tax-sheltered retirement contributions while satisfying my other financial obligations. I have $300K home equity and $200K mortgage. In 2017, I am making $6.5K in mortgage payment which is 4.70% of my gross employment income.
With over $300K in income I would assume that you could quickly pay off your mortgage if you wanted to.

That puts you in a much different situation than many people that choose an ARM just to be able to have a lower payment they need to be able to afford the house. Most people could not just pay off the mortgage if it no longer makes sense a few years from now.

I think that the bigger issue for you is why you have any mortgage at all if your financial situation has not changed in the last few years. If you are at a point where you could easily pay off the mortgage then keeping the mortgage is using leverage and no matter how you look at it leverage increases your risk just like using a margin loan. Some would say that is a good bet but you may not have any real need to bet at all.

Keeping an unneeded mortage can also lead to lifestyle creep. With your income if paying off the house quickely would make any real difference in your budget then I think your need to take a hard look at your other expenses.

chipperd
Posts: 312
Joined: Sat Sep 24, 2011 5:58 am

Re: Why You Took an Adjustable Rate Mortgage?

Post by chipperd » Mon Dec 18, 2017 6:09 am

We actually took out a HELOC to finance the purchase of our home in spring, 2009 at 2.24% and paid the same monthly amount as if we had a 30-year traditional mortgage. It's up to 3.5% now and we will be refinancing to a fixed in the spring. It's been a really good deal for us, but we did it knowing we would refinance when the adjustable moved up to the point it is at now. Due to the manner in which a traditional mortgage amortizes, we could payoff much more principle early on before a planned refinance at this point in the game. Our outstanding balance is about 92k now and would be 195k had we done a 30 year traditional. Risk vs reward paid off for us in this instance.

MarkBarb
Posts: 175
Joined: Mon Aug 03, 2009 11:59 am

Re: Why You Took an Adjustable Rate Mortgage?

Post by MarkBarb » Mon Dec 18, 2017 7:17 am

ARM vs Fixed is a complicated choice. Things we considered when getting mortgages:

1) How much lower was the ARM interest rate?
2) How likely were we to still have the mortgage after the rate started adjusting?
3) How high would our payment be in the worst case ARM scenario? How about other more likely scenarios?

We bought our first house with a fixed rate because I didn't even think to look at ARMs. I was under the impression that they were bad for vague reasons.

For our second house, the rate spread was very large. We were buying much less house than we could afford, so even in the worst case ARM scenario we would be fine. In any likely scenario, the ARM was much cheaper, especially if we move or paid the house off early.

For our third house, the rate spread was smaller, but our plan was to pay off the house early. Once again, the ARM looked cheaper under most of our likely scenarios and the worst case scenario didn't look too bad.

lazydavid
Posts: 1655
Joined: Wed Apr 06, 2016 1:37 pm

Re: Why You Took an Adjustable Rate Mortgage?

Post by lazydavid » Mon Dec 18, 2017 8:00 am

We looked into an ARM when we refinanced last year, but the starter rates were all at least 1% higher than fixed rate loans. So 15 years at 2.5% it is. :mrgreen:

John Laurens
Posts: 364
Joined: Mon Nov 14, 2016 7:31 pm

Re: Why You Took an Adjustable Rate Mortgage?

Post by John Laurens » Mon Dec 18, 2017 9:00 am

I took a 5 year ARM once. I paid the mortgage in full in less than 3 years.

Regards,
John

Olemiss540
Posts: 514
Joined: Fri Aug 18, 2017 8:46 pm

Re: Why You Took an Adjustable Rate Mortgage?

Post by Olemiss540 » Mon Dec 18, 2017 10:08 am

alex_686 wrote:
Sun Dec 17, 2017 11:53 pm
There was a Fed study back before the 2008 crisis. Covered 20 years of real world mortgages. 9 times out of 10 people did better by going the adjustable rate mortgage. Adjustable rate mortgages have a lower initial rate and over the life of the loan you win with that lower rate. It is a risk that rates will spike. Convention says to go with the lower risk fixed rate mortgage but not that you "lack strong foundation or understanding in financial management".
Seems like a useless study comparing a period of two totally different interest rate environments. How about the twenty years prior to that (covering real inflation in the high teens)? Do you believe the previous 20 years to be a good predictor of interest rates moving forward?

There is a reason ARMs are offered at a discount, due to the reduced rate risk the banks have to assume. If you can afford to self insure against that rate risk and the discount is suffient to offset your risk, then it is a good financial move. If you CANNOT afford to maintain payments if your rate resets and the housing market plummets (causing inability to sell), than you are at risk of causing serious financial losses and should not consider a product with floating rates.
I hold index funds because I do not overestimate my ability to pick stocks OR stock pickers.

User avatar
sunny_socal
Posts: 1552
Joined: Tue Mar 24, 2015 4:22 pm

Re: Why You Took an Adjustable Rate Mortgage?

Post by sunny_socal » Mon Dec 18, 2017 11:12 am

I find it hard to imagine a situation where I would want an ARM. Perhaps if I were in the military and knew I would be moving in a couple years...

I'm in a 15-yr @ 2.625, feels very good! Local renters are paying much more for a small apartment than I am for my house :beer

User avatar
BrandonBogle
Posts: 2073
Joined: Mon Jan 28, 2013 11:19 pm

Re: Why You Took an Adjustable Rate Mortgage?

Post by BrandonBogle » Mon Dec 18, 2017 11:22 am

DrGoogle2017 wrote:
Mon Dec 18, 2017 1:37 am
What edge case are you referring to? Anytime some banks send me a 0 APR cash advance, there is always small writing stating I will be paying 3% cash advance. Not only that in the last few years, it’s very hard to get a 3% CD on a 5 year term. So I don’t see the advantage. Plus these 0 APR is only for short term, much less than 1 year to 18 months. You will end up losing money in the end period.
I had a 0% balance transfer (deposited into my checking account) with a 3% CAPPED fee ($75) that I put around $100k into 6+% CDs back in 2008. Those CDs had promotional renewal rates for three years that kept me above 6% for each term. Prior to that, I did some 4% CDs with an auto-loan at 0% instead of paying cash for my prior vehicle. Today it is harder to find good CD rates and capped fees, but it does still happen and using credit-card leverage wisely still is an edge case.

Bacchus01
Posts: 1744
Joined: Mon Dec 24, 2012 9:35 pm

Re: Why You Took an Adjustable Rate Mortgage?

Post by Bacchus01 » Mon Dec 18, 2017 11:45 am

DrGoogle2017 wrote:
Sun Dec 17, 2017 11:42 pm
Bacchus01 wrote:
Sun Dec 17, 2017 11:39 pm
DrGoogle2017 wrote:
Sun Dec 17, 2017 11:35 pm

I don’t know about that. Googling for that first sentence and a bunch of stuff comes up with similar sentiment. Here is one.
https://www.cbsnews.com/news/adjustable ... -comeback/
I understand that there is conjecture out there that it was one of the causes, I just think it was a SMALL input. The instrument itself was not really the problem, the problem was the low qualification requirements, government policy on required lending by Fannie/Freddie and the bundling of loans into new tools that the risk was not transparent and appropriately valued.

I don't think the tools themselves (ARMs, interest only, etc.) are bad and I think they are really good tools for some when used appropriately.
Most people get ARMs because they probably can’t qualify for 30 year mortgage. I know there are exceptions, but I think it’s already implied that they have low qualifications. That’s why there are no closing costs.
What? This is entirely baseless. An ARM IS a 30-year mortgage. And no closing costs has nothing to do with ARMs. You can get a no closing cost 30-year fixed mortgage as well. I've had probably a half dozen ARMs and none o f them came without closing costs. Why does this bad information continue out there?

Bacchus01
Posts: 1744
Joined: Mon Dec 24, 2012 9:35 pm

Re: Why You Took an Adjustable Rate Mortgage?

Post by Bacchus01 » Mon Dec 18, 2017 11:48 am

sunny_socal wrote:
Mon Dec 18, 2017 11:12 am
I find it hard to imagine a situation where I would want an ARM. Perhaps if I were in the military and knew I would be moving in a couple years...

I'm in a 15-yr @ 2.625, feels very good! Local renters are paying much more for a small apartment than I am for my house :beer
Assume you were in a 30 at 4% and the 5/1 ARM was 2.5%. Assume that the ARM resets to it's max adjustment of say 2% in year 6 and then 1% each year beyond. Calculate the payback period of being with the ARM. In most cases it's not about a 5 year horizon, it's often 10+ before the payback is better on the fixed.

That all changed as rates squeezed and the difference between a 5/1 ARM and a 30-fixed are like .25%. Then the payback leads you more likely to a fixed rate. Since the spread between a 15 and 30 has been so large lately, it seems to drive you towards a 15-fixed for many.

Bacchus01
Posts: 1744
Joined: Mon Dec 24, 2012 9:35 pm

Re: Why You Took an Adjustable Rate Mortgage?

Post by Bacchus01 » Mon Dec 18, 2017 11:50 am

alex_686 wrote:
Sun Dec 17, 2017 11:53 pm
2 points.

There was a Fed study back before the 2008 crisis. Covered 20 years of real world mortgages. 9 times out of 10 people did better by going the adjustable rate mortgage. Adjustable rate mortgages have a lower initial rate and over the life of the loan you win with that lower rate. It is a risk that rates will spike. Convention says to go with the lower risk fixed rate mortgage but not that you "lack strong foundation or understanding in financial management".

The interest only part is a different game. In theory this would work very well for a highly discipline investor who had the ability and willingness to take a high level of risk. For this to work you must take the principle payments you would have made and successfully invest them in a bull market. The problem is that interest only products are not sold to highly discipline investors who have the ability to take risk. 2008 was very nasty. Even a slow down in housing prices can be a issue. The road is littered with failures.
There is a different case for interest only. It can get you into a house for cheaper than rental rates, and the payments are tax deductible. You might argue why not buy? But some people don't want to. The risk you carry is the transaction cost of selling (high) and the probability of the value declining (moderate). But, you get in and your cash flow is much lower and it's often less than rental charges.

I wouldn't recommend that for the vast majority of people.

FraggleRock
Posts: 362
Joined: Sun Feb 12, 2017 6:50 pm

Re: Why You Took an Adjustable Rate Mortgage?

Post by FraggleRock » Mon Dec 18, 2017 12:02 pm

We bought a house in 1987 for cash and then spent an amount greater than the purchase price on a renovation.
At completion of the renovation we had a choice on how to go from construction loan to mortgage.
I chose an ARM. Lower rate, lower costs.
I refinanced a number of times during the next 24 years.
Always ARMs (average rate was good and max was 7%).
Until 2008 when I panicked and thought rates were going to go up (Yes, I know. Isn't hindsight wonderful?) so I went with a 30-year fixed. I mean, who thought rates were going to stay as low as 4.5%?
Sold house 2011 and downsized mortgage to zero on new house.

This table http://www.freddiemac.com/pmms/pmms30.html says I made the right moves.

CurlyDave
Posts: 640
Joined: Thu Jul 28, 2016 11:37 am

Re: Why You Took an Adjustable Rate Mortgage?

Post by CurlyDave » Mon Dec 18, 2017 12:26 pm

I bought my first house in 1972. Over the years I have had about 30 mortgages, really too many to count. Both primary residence and investment properties. More refinances than initial purchases in that total, but a goodly number of each.

About 2/3 have been ARMs, and never once have I regretted getting an ARM.

They only make a lot of sense when interest rates are high and the spread is a couple of percent.

In the past 7 years I have refinanced all into fixed, taking advantage of the low interest rates. I have never paid off a mortgage through the monthly payments, only by either selling the property or through a refinance.

Some very conservative people on here may think that is foolish and "too risky", but DW and I have made the two comma club in both real estate and stocks.

Right now, the way I read the tea leaves is that interest rates are increasing and there is a lot of "pent-up inflation" in the economy fueled by years of quantitative easing. This argues strongly for a fixed-rate mortgage of long duration.

User avatar
Pajamas
Posts: 6015
Joined: Sun Jun 03, 2012 6:32 pm

Re: Why You Took an Adjustable Rate Mortgage?

Post by Pajamas » Mon Dec 18, 2017 12:37 pm

Years ago, I took a mortgage that would adjust after 7 years because it was at a significantly lower rate of interest than a fixed-rate mortgage and I figured that if I didn't like the adjusted rate, I would be able to pay it off at that time without penalty instead of continuing to carry it, so the risk of interest-rate uncertainty would only work in my favor. There was a cap on any interest rate increase and the amount of the mortgage was low enough that I could have easily made payments regardless, as long as I was working.

It turned out that the new interest rate was lower when it adjusted, but I paid it off within a couple of years, anyway.

So the decision was based on cost and the fact that there was very low risk of an adverse outcome. If the adjustable mortgage hadn't had a significantly lower rate of interest or if there had been uncertainty about being able to repay it in full because of the balance, I might have taken a fixed-rate mortgage, instead.

scrabbler1
Posts: 2192
Joined: Fri Nov 20, 2009 2:39 pm

Re: Why You Took an Adjustable Rate Mortgage?

Post by scrabbler1 » Mon Dec 18, 2017 2:13 pm

When I took a mortgage on my co-op apartment back in 1989, all that was available was ARMs. I didn't like the interest rate risk for 1-year ARMs at the time, especially with rates in general so high (nearly 11%). I was teetering between a 3-year ARM and a 5-year ARM and opted for the latter. Turned out to be a bad choice when interest rates fell sharply later in 1989 and for the next few years. Saddled with the huge monthly payment while new mortgage rates were much lower, I refinanced into a 1-year ARM at 6% in 1992. That saved me over $200 per month! Interest rates crept up in the next few years, but so did the markets and my salary. Taken together, I was able to pay off the loan in 1998.

DrGoogle2017
Posts: 1322
Joined: Mon Aug 14, 2017 12:31 pm

Re: Why You Took an Adjustable Rate Mortgage?

Post by DrGoogle2017 » Mon Dec 18, 2017 3:00 pm

Bacchus01 wrote:
Mon Dec 18, 2017 11:45 am
DrGoogle2017 wrote:
Sun Dec 17, 2017 11:42 pm
Bacchus01 wrote:
Sun Dec 17, 2017 11:39 pm
DrGoogle2017 wrote:
Sun Dec 17, 2017 11:35 pm

I don’t know about that. Googling for that first sentence and a bunch of stuff comes up with similar sentiment. Here is one.
https://www.cbsnews.com/news/adjustable ... -comeback/
I understand that there is conjecture out there that it was one of the causes, I just think it was a SMALL input. The instrument itself was not really the problem, the problem was the low qualification requirements, government policy on required lending by Fannie/Freddie and the bundling of loans into new tools that the risk was not transparent and appropriately valued.

I don't think the tools themselves (ARMs, interest only, etc.) are bad and I think they are really good tools for some when used appropriately.
Most people get ARMs because they probably can’t qualify for 30 year mortgage. I know there are exceptions, but I think it’s already implied that they have low qualifications. That’s why there are no closing costs.
What? This is entirely baseless. An ARM IS a 30-year mortgage. And no closing costs has nothing to do with ARMs. You can get a no closing cost 30-year fixed mortgage as well. I've had probably a half dozen ARMs and none o f them came without closing costs. Why does this bad information continue out there?
Because I was assigned to an ARM mortgage when I first bought my house, without my knowledge of course, loan person said my credit history was not good enough to get a good fixed rate. It’s not baseless, it’s from experience. And when the mortgage reset after the initial period, the rates were higher. I got stuck with paying much higher interest rate. This was back in 1989 time frame. I agree with your point that you can get no closing cost with fixed mortgage, that’s how I refinanced, but I’m sure I paid with slightly higher rate than without.

an_asker
Posts: 2133
Joined: Thu Jun 27, 2013 2:15 pm

Re: Why You Took an Adjustable Rate Mortgage?

Post by an_asker » Mon Dec 18, 2017 3:17 pm

Shikoku wrote:
Sun Dec 17, 2017 8:51 pm
At present I have an adjustable rate mortgage (ARM). It is actually an interest-only ARM which keeps my mortgage payment pretty low. This allows me to maximize my tax-sheltered retirement contributions while satisfying my other financial obligations. I have $300K home equity and $200K mortgage. In 2017, I am making $6.5K in mortgage payment which is 4.70% of my gross employment income.

I was told that my having an ARM is one of the indications that I lack strong foundation or understanding in financial management. Have you ever took an ARM? If so, why?
I've taken an ARM. Why? Because I calculated the difference between the ARM and the fixed interest rate mortgage to be sufficient enough that if we kept paying towards the principal, we'd pay less in total interest compared to the fixed interest rate mortgage, and pay the loan off quicker as well.

Whether a person gets an ARM or not depends on his/her personal circumstances, as well as the comparable terms of the two loans offered. Like someone else responded on this thread, if their employer subsidizes a majority of the interest payment, it makes absolute sense to get an interest only ARM even (something I would never dream of having ... without the backing of the employer) especially in a hot HCOL area with limited housing and housing growth potential!

Getting back to your specific scenario, I believe that on another thread you had some discussion about tuition costs, etc. With that in mind, it might make sense to have a large interest-only mortgage (something I would probably avoid doing, but that is neither here nor there, as I am not aware in detail of your personal situation). BTW, if you call Dave Ramsey (most folks here don't like him all that much but he's pretty good at helping folks who are in debt get out of it), he'll chew your head off! I'm sure his syndicated talk show appears on one of your local radio stations. If you're interested, you could google him and listen to old podcasts.

Dandy
Posts: 5215
Joined: Sun Apr 25, 2010 7:42 pm

Re: Why You Took an Adjustable Rate Mortgage?

Post by Dandy » Mon Dec 18, 2017 4:13 pm

Not me. But I do remember some people in the 2008 crisis had adjustable mortgages and when the rates went up they couldn't refinance (few mortgages were being granted) and they got stuck with rates they couldn't afford and lost their house. :oops:

Bacchus01
Posts: 1744
Joined: Mon Dec 24, 2012 9:35 pm

Re: Why You Took an Adjustable Rate Mortgage?

Post by Bacchus01 » Mon Dec 18, 2017 4:21 pm

DrGoogle2017 wrote:
Mon Dec 18, 2017 3:00 pm
Bacchus01 wrote:
Mon Dec 18, 2017 11:45 am
DrGoogle2017 wrote:
Sun Dec 17, 2017 11:42 pm
Bacchus01 wrote:
Sun Dec 17, 2017 11:39 pm
DrGoogle2017 wrote:
Sun Dec 17, 2017 11:35 pm

I don’t know about that. Googling for that first sentence and a bunch of stuff comes up with similar sentiment. Here is one.
https://www.cbsnews.com/news/adjustable ... -comeback/
I understand that there is conjecture out there that it was one of the causes, I just think it was a SMALL input. The instrument itself was not really the problem, the problem was the low qualification requirements, government policy on required lending by Fannie/Freddie and the bundling of loans into new tools that the risk was not transparent and appropriately valued.

I don't think the tools themselves (ARMs, interest only, etc.) are bad and I think they are really good tools for some when used appropriately.
Most people get ARMs because they probably can’t qualify for 30 year mortgage. I know there are exceptions, but I think it’s already implied that they have low qualifications. That’s why there are no closing costs.
What? This is entirely baseless. An ARM IS a 30-year mortgage. And no closing costs has nothing to do with ARMs. You can get a no closing cost 30-year fixed mortgage as well. I've had probably a half dozen ARMs and none o f them came without closing costs. Why does this bad information continue out there?
Because I was assigned to an ARM mortgage when I first bought my house, without my knowledge of course, loan person said my credit history was not good enough to get a good fixed rate. It’s not baseless, it’s from experience. And when the mortgage reset after the initial period, the rates were higher. I got stuck with paying much higher interest rate. This was back in 1989 time frame. I agree with your point that you can get no closing cost with fixed mortgage, that’s how I refinanced, but I’m sure I paid with slightly higher rate than without.
You said "most people." Your experience is "one person." You may be right, but I have never heard that. I believe you more than likely got taken by your banker.

texas lawdog
Posts: 80
Joined: Tue Jun 07, 2016 5:33 pm

Re: Why You Took an Adjustable Rate Mortgage?

Post by texas lawdog » Mon Dec 18, 2017 4:48 pm

I took a 10/1 ARM loan years ago...

My reasons,
1. Most people move on average every 7 years and thought I might be one of them
2. The flexibility of paying the smaller mortgage payment or prepaying my mortgage was appealing
3. The spread between the fixed rate and the floating rate was larger than it is now

BruDude
Posts: 2719
Joined: Thu Dec 30, 2010 12:28 am
Location: Las Vegas

Re: Why You Took an Adjustable Rate Mortgage?

Post by BruDude » Mon Dec 18, 2017 4:50 pm

Halfvolley wrote:
Sun Dec 17, 2017 8:56 pm
I took a Penfed 5/5 30 year ARM at 2.75%

Reasons:
- 0 closing costs
- Breakeven of ~10 years compared to a 30 year fixed
- I planned to move in less than 10 years

I ended up selling the place a year or so before the rate adjusted.
x2

hmmm
Posts: 3
Joined: Wed Jul 12, 2017 5:19 pm

Re: Why You Took an Adjustable Rate Mortgage?

Post by hmmm » Tue Dec 19, 2017 2:05 pm

I have used ARM's.

Generally speaking, I am not fond of the uncertain future interest rates, but I have used them with the intent of getting out of the loan (via sale or refinancing the loan) before the initial fixed rate could have changed. I think there are very few scenarios where I would entertain an interest only loan since I would not be building any equity without making extra payments.
I suppose a less risk averse individual may utilized the extra cash flow (if not overextended) to attempt to net additional returns (beyond the the more certain returns of debt payments) with other investments. These other investments could be used to pay down principal or hope that the sale of the home would not leave you upside-down if option 1 fell through.

I have utilized 5/1 30yr mortgages when they have seemed advantageous but understood the inherent risks.
-when I was going to have a fairly certain dramatic rise in income and a likely move before the end of the initial fixed rate could change.

-moving to a new location and used an ARM through a regional bank since I moved before my start date and couldn't get a conventional loan through them without 2 paychecks (used a job contract). I refinanced to a 15yr fixed without closing costs when interest rates dropped.

It's hard to say a decision demonstrates lack of financial understanding without knowledge of the context and the personal priorities of that individual.

CnC
Posts: 531
Joined: Thu May 11, 2017 12:41 pm

Re: Why You Took an Adjustable Rate Mortgage?

Post by CnC » Tue Dec 19, 2017 2:49 pm

We took a 7 year balloon for our house my then girlfriend and I bought at 22.

It was a very cheap rate and was financed by our local bank. Because I had no credit but my bank knew I had a good job and came from a good family.


This was 08 mid crash.

Alex Frakt
Founder
Posts: 10852
Joined: Fri Feb 23, 2007 1:06 pm
Location: Chicago
Contact:

Re: Why You Took an Adjustable Rate Mortgage?

Post by Alex Frakt » Fri Dec 22, 2017 1:25 am

Locked. OP does not have an actionable question (see post on general comment threads) and is in violation of our policy: If you feel that someone has attacked you or otherwise violated the policies of this forum, do not respond in kind. Instead, please click the report button on the offending post.

Locked