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