If you’ve ever asked anyone for mortgage advice, you’ve probably been told by well-meaning, conservative folks that in most circumstances, you should never get an adjustable-rate mortgage, aka ARM. The reason: Sure, an ARM’s initial low interest rate might look enticing, but as the name suggests, that rate will change later—and most likely go up.
Well, call me crazy, but my husband and I got an ARM. And it was so not what I’d imagined!
Curious to hear how this decision impacted our finances over five, 10 years—and beyond? Allow me to walk you through the details, and what I learned in the process.
Why we got an adjustable-rate mortgage
It all started back in 2007, when my fiancé, Jim, and I had found the perfect house for sale for $1.25 million—which I know sounds like a lot, but we lived in Los Angeles, where housing prices were ridiculous (and still are today).
We’d both been scrimping and saving for decades. I’d just signed a book contract, and had extra funds from the purchase and sale of two condos previously. This was not my first trip to the real estate rodeo, nor was it Jim’s; he’d bought and sold a house as well. Even though $1.25 million was at the very top of our budget, we were ready to combine our savings and close the deal about a month before tying the knot.
Up until this point, I’d been a financially conservative, 30-year fixed-rate mortgage type of girl. Jim was more of a liberal, “Let’s check out our options” kind of guy. He was also very persuasive.
He told me, “Unless you plan to live in your house for 30 years and pay it off, a 30-year fixed doesn’t make sense. It’s better to pay the least to net the most.”
I reluctantly agreed. So we got an ARM, and to ratchet up my nerves further, it was an interest-only loan. That meant that for 10 years, we wouldn’t be paying back any principal at all. Jim said this was OK, since our home’s value was likely to rise, so we’d gain equity that way.
Or so we thought.
ARM: The first five years
On closing day, we put $225,000 down, leaving a cool million to finance. At the time, the best interest rates we could get on a five-year ARM was 5.875%. That meant our monthly payments would amount to $4,895 (rounding off numbers, for simplicity’s sake) for the first five years. After that, they’d adjust once every year for the next 25 years.
All was fine at first. But a year in, the housing bubble burst. Since we’d bought right when the market had peaked, the value of our home started dropping, fast.
For certain ARMs, the housing crash actually had a weird upside: Interest rates plummeted, so many ARM owners enjoyed lower mortgage payments than ever. Alas, our own ARM was fixed for those five years, so we couldn’t take advantage of that—and we couldn’t refinance because we were underwater on our mortgage and had so little equity in our home.
I figured that by the time our interest rate started adjusting four years later, mortgage rates would start going up.
ARM: Five years in
Yet once our five-year fixed-rate term was over, our interest rate began adjusting—even lower than before! Jim and I couldn’t believe our good luck. And it continued to adjust downward for the next five years.
One year, when our rate went below 3%, we were only paying $2,370 per month for a $1 million+ home. Woohoo! We took a nice cruise that year to celebrate.
ARM: Ten years in
But the fun came to a crashing halt at the end of our 10-year term in 2017.
At that point, interest rates rose to 4.7% … and continued to climb. Plus, due to our interest-only loan, it was now time to pay off principal and interest. Our monthly payments ballooned to over $6,300 per month.
When I showed Jim our new monthly payment, a panicked discussion ensued. We desperately tried to refinance, but by then, lenders had tightened up their restrictions on who could qualify—and our careers and incomes had changed considerably. My books had long since been published, and while I was thriving as a freelance journalist, that doesn’t look great on a loan application. As for Jim, he was in the middle of transitioning from successful small business owner to “Sci-Fi Rock Guy.” (I know. But remember: L.A.).
“At least we’re finally paying off some principal,” Jim said, sweat running down his forehead.
There was that. Almost $3,000 of our monthly payment was going toward principal, although that was cold comfort as we scrambled to make our monthly payments.
How we finally refinanced our adjustable-rate mortgage
Yet after about a year of numbly writing checks, we got a call from Darren Hammel, a sales manager at Wells Fargo, where we’d signed up for our ARM over a decade earlier.
“Your payments are really high,” he commented. “Would you like to look into lowering them with a refi?”
I was ecstatic. Jim was suspicious.
“Why would a bank want to lower our payments?” he asked. “And besides that, we won’t qualify.”
But Darren explained that we had a good history with Wells Fargo, and it behooved them to keep customers like us on their books. They were also willing to keep the refi expenses to a minimum—we would be charged very little for the pleasure of the transaction.
Ironically enough, we discovered that we could only qualify to refi if we went with that good old traditional 30-year-fixed interest rate. Yes, things had changed since we’d first applied for a home loan 12 years earlier!
Within no time, Darren worked his mortgage magic, and a few months later, we’re sitting pretty with a 30-year, 4.121% interest rate mortgage with nice, comfortable, predictable payments of $4,570 per month. And because Wells Fargo had that notorious computer breakdown in the middle of closing, we were given a $2,500 mortgage credit for our troubles. Nice!
So we are now better off than when we started, and the value our home has increased again. We have more equity in the place, even though we haven’t paid it down much. To tell you the truth, if we’d gotten a 30-year fixed-rate mortgage in the beginning, we wouldn’t have had to go through all the turmoil, and we’d have more equity in our home now.
Still, it could have been much, much worse. Had we not had money on hand to pay our mortgage, we could have lost our home.
It all worked out all right, but in the end, I’d have to say that I agree with those well-meaning, conservative folks: Signing up for an ARM imperiled my finances and peace of mind. I’m not saying there wouldn’t be instances where I’d try and ARM again, but I’d think about it very carefully.
After all, life, much like interest rates, is unpredictable.
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