15-year Adjustable Rate Mortgage.
March 2, 2023 10:37 AM Subscribe
I'm shopping around mortgage lenders and one we like offered a 15-year Adjustable Rate Mortgage (rate stays the same for 15 years; total term is 30 years). What's the catch?
I haven't seen this kind of loan anywhere else. The lender is a good local credit union. The interest rate is attractively lower than 30-year conventional loans we've been looking at.
We may stay in the new house longer than 15 years, but just as likely not. We would likely refinance within that 15-year term, though I guess that's the gamble with adjustable rates.
We've never used an adjustable rate loan. What are the other catches besides the rate changing after 15 years?
Would you consider this loan or not?
I haven't seen this kind of loan anywhere else. The lender is a good local credit union. The interest rate is attractively lower than 30-year conventional loans we've been looking at.
We may stay in the new house longer than 15 years, but just as likely not. We would likely refinance within that 15-year term, though I guess that's the gamble with adjustable rates.
We've never used an adjustable rate loan. What are the other catches besides the rate changing after 15 years?
Would you consider this loan or not?
What's the rate vs a 15 year loan, and can you swing the extra to turn this one into a 15 year loan?
Generally, you're betting that either you're gonna move, or that interest rates are gonna be lower some time in the next 15 years than they are now. Rates are pretty high right now relative to a few years ago (we locked in our current mortgage at circa 2%), but historically they spiked as high as 18.45% in 1981.
I'd be tempted to go for it, and consider the difference in payments between this and an actual 15 as a little budget breathing room, but try to pay it down faster. At least until rates are low enough again that a refi to give you available capital makes sense.
posted by straw at 11:07 AM on March 2, 2023 [1 favorite]
Generally, you're betting that either you're gonna move, or that interest rates are gonna be lower some time in the next 15 years than they are now. Rates are pretty high right now relative to a few years ago (we locked in our current mortgage at circa 2%), but historically they spiked as high as 18.45% in 1981.
I'd be tempted to go for it, and consider the difference in payments between this and an actual 15 as a little budget breathing room, but try to pay it down faster. At least until rates are low enough again that a refi to give you available capital makes sense.
posted by straw at 11:07 AM on March 2, 2023 [1 favorite]
Before you sign a mortgage, the lender will have given you a long stack of documents for you to sign in front of a notary. One of them is called a loan estimate and it summarizes the terms of your mortgage on one page.
This summary includes whether or not you would have a prepayment penalty, and how much it is if your mortgage will have such a penalty. My mortgage does not have a penalty, and many don't, but yours might. It would depend on the terms you sign when you buy a mortgage.
I would definitely look at the loan estimate for gotchas like this. The profitability of ARM mortgages is a gamble predicated on you paying more interest and fees etc. over the life of the ARM loan, than for a fixed-rate loan. Making prepayment costly would be one way to hedge that bet.
posted by They sucked his brains out! at 11:16 AM on March 2, 2023 [2 favorites]
This summary includes whether or not you would have a prepayment penalty, and how much it is if your mortgage will have such a penalty. My mortgage does not have a penalty, and many don't, but yours might. It would depend on the terms you sign when you buy a mortgage.
I would definitely look at the loan estimate for gotchas like this. The profitability of ARM mortgages is a gamble predicated on you paying more interest and fees etc. over the life of the ARM loan, than for a fixed-rate loan. Making prepayment costly would be one way to hedge that bet.
posted by They sucked his brains out! at 11:16 AM on March 2, 2023 [2 favorites]
It's unlikely, but be sure there's no pre-payment penalty, or that you owe anything if you end up paying it off early and/or selling the house before the 30 years are up.
Piggybacking off TurkishGolds, make sure that you can direct extra payments toward the principal if you want.
I've never seen that type of loan and it sounds like a good deal, but because it's unconventional, it may have some oddities hidden in the fine print.
posted by hydra77 at 11:17 AM on March 2, 2023
Piggybacking off TurkishGolds, make sure that you can direct extra payments toward the principal if you want.
I've never seen that type of loan and it sounds like a good deal, but because it's unconventional, it may have some oddities hidden in the fine print.
posted by hydra77 at 11:17 AM on March 2, 2023
I refinanced to an ARM some years back. My loan officer said it was a no brainer in my case partly because my original mortgage was not great terms.
But her basic question was, are you for sure going to be in this place for 30 years and not refinance again? If so this is risky. On the other hand if you plan to refinance or sell some time in the next 10-15 years, the money you'll save on the first half massively outweighs what you might pay even in a couple years of higher rates later, because your principal will be paid down considerably by then.
I think the bad outcome is you go from a fixed good rate to a slightly lower ARM and save a little money, but end up paying more later and high rates prevent you from getting a better deal. But as straw points out, we're at a local high rate-wise so if this rate is better than your current one, and you think you can refi in a few years anyway, there are probably no major downsides other than paperwork.
I'm definitely no financial adviser but it's been good for me so far and no gotcha terms. It gave me room to make extra principal payments so I'm insulating myself even if I end up with bad terms 10 years from now for whatever reason.
posted by BlackLeotardFront at 11:18 AM on March 2, 2023
But her basic question was, are you for sure going to be in this place for 30 years and not refinance again? If so this is risky. On the other hand if you plan to refinance or sell some time in the next 10-15 years, the money you'll save on the first half massively outweighs what you might pay even in a couple years of higher rates later, because your principal will be paid down considerably by then.
I think the bad outcome is you go from a fixed good rate to a slightly lower ARM and save a little money, but end up paying more later and high rates prevent you from getting a better deal. But as straw points out, we're at a local high rate-wise so if this rate is better than your current one, and you think you can refi in a few years anyway, there are probably no major downsides other than paperwork.
I'm definitely no financial adviser but it's been good for me so far and no gotcha terms. It gave me room to make extra principal payments so I'm insulating myself even if I end up with bad terms 10 years from now for whatever reason.
posted by BlackLeotardFront at 11:18 AM on March 2, 2023
15 years seems like an unusually long term for an ARM. If you were planning to keep the house or stay there well past the term, I'd be taking a closer look at which option gives you not only the lowest total cost, but also the most certainty/security. If you know that you plan to sell when or before that 15-year term is up, people generally favor the lowest rate they can get.
When I bought my house, I had the choice of a (shorter-term, 7-year) ARM, or a fixed rate at a slightly higher rate. This is when rates were really low, and my fixed-rate was around 3%. Seeing how my parents bought the house I grew up in with a mortgage at 12%, and that I figured rates probably weren't going to get any lower, or at least not much, I went with the fixed rate even though it was a bit higher. I preferred that locked-in certainty, not having to worry about suddenly having to deal with a much higher rate at the end of the ARM term.
I would get an amortization table for the life of the term in print (showing the split between principle / interest), and I'd also want to see clarification in print on certain issues, like any penalties for paying it off early; if you happen to be late on a single payment do your rates skyrocket, and so on. I remember around (probably just before) the 2008 mortgage bomb, lenders were offering "interest-only" ARMs, bullshit like that; packages designed to squeeze buyers into way more home than they could afford. After all that, I just assume that mortgage lenders are out to screw us as savagely as possible, and would approach any transaction with a healthy dose of skepticism.
The house always wins; if the deal seems unusually good, I'd really want to know where the catch is.
posted by xedrik at 11:19 AM on March 2, 2023 [1 favorite]
When I bought my house, I had the choice of a (shorter-term, 7-year) ARM, or a fixed rate at a slightly higher rate. This is when rates were really low, and my fixed-rate was around 3%. Seeing how my parents bought the house I grew up in with a mortgage at 12%, and that I figured rates probably weren't going to get any lower, or at least not much, I went with the fixed rate even though it was a bit higher. I preferred that locked-in certainty, not having to worry about suddenly having to deal with a much higher rate at the end of the ARM term.
I would get an amortization table for the life of the term in print (showing the split between principle / interest), and I'd also want to see clarification in print on certain issues, like any penalties for paying it off early; if you happen to be late on a single payment do your rates skyrocket, and so on. I remember around (probably just before) the 2008 mortgage bomb, lenders were offering "interest-only" ARMs, bullshit like that; packages designed to squeeze buyers into way more home than they could afford. After all that, I just assume that mortgage lenders are out to screw us as savagely as possible, and would approach any transaction with a healthy dose of skepticism.
The house always wins; if the deal seems unusually good, I'd really want to know where the catch is.
posted by xedrik at 11:19 AM on March 2, 2023 [1 favorite]
This seems like a good product and gives you 15 years for the rate to go down to something decent. I'd go for it, assuming you can't find a fixed 30 year rate in the 5% range.
posted by The_Vegetables at 1:03 PM on March 2, 2023
posted by The_Vegetables at 1:03 PM on March 2, 2023
Also, refinancing is a couple of thousand dollars at most, and no more difficult that getting an initial mortgage. I wouldn't put the effort of that as a detractor. There are plenty of reasons you'd do it without wanting to change your rate.
posted by The_Vegetables at 1:11 PM on March 2, 2023
posted by The_Vegetables at 1:11 PM on March 2, 2023
Here is a "15/15 ARM" being offered by a credit union, probably not your credit union, but the deal seems to be what you are describing. So for 15 years, you're paying on the basis of a 30-year amortization at a lower interest rate. This saves a considerable amount of interest, reduces your monthly payments, AND result in more of your principal being paid off by the time you hit the 15-year mark. Use an amortization schedule calculator like this one to see how much for your particular case. If the numbers look good to you, go for it; as noted you can always refinance sometime during the first 15 to lock in a better rate for the duration.
posted by beagle at 1:41 PM on March 2, 2023 [1 favorite]
posted by beagle at 1:41 PM on March 2, 2023 [1 favorite]
One thing that got a lot of people in trouble with ARMs during the Great Recession is that you can only refinance if you have equity in your home. So if there is another correction in the housing market (either locally or nationally) and you have not yet built enough equity through mortgage payments, you would not be able to refinance and take advantage of lower rates. This is another reason it's important to look at how much of your payments go to interest vs. principal to see how quickly you can pay down the principal.
posted by lunasol at 2:14 PM on March 2, 2023 [1 favorite]
posted by lunasol at 2:14 PM on March 2, 2023 [1 favorite]
So if there is another correction in the housing market (either locally or nationally) and you have not yet built enough equity through mortgage payments, you would not be able to refinance and take advantage of lower rates.
That's not true. You don't have to have equity to refinance if you have good credit (which you have to have to buy a home in the first place now, at least relatively easily). The 2008 thing was most people lost their jobs, and therefore had bad credit (but the job loss thing was way more important). There was also only a really short period of time during that when rates were rising; they were generally falling from 2007-2020.
posted by The_Vegetables at 2:30 PM on March 2, 2023
That's not true. You don't have to have equity to refinance if you have good credit (which you have to have to buy a home in the first place now, at least relatively easily). The 2008 thing was most people lost their jobs, and therefore had bad credit (but the job loss thing was way more important). There was also only a really short period of time during that when rates were rising; they were generally falling from 2007-2020.
posted by The_Vegetables at 2:30 PM on March 2, 2023
I mean it does sound like a helluva good deal overall. Mortgage rates are high right now so I would think that they'd come down after this administration and just in general. But yes like others have said, look at your loan estimate before signing anything.
posted by mrabbe at 10:21 AM on March 4, 2023
posted by mrabbe at 10:21 AM on March 4, 2023
« Older Help me find an essay about covid, death, and... | loveless vanilla bean in a cold climate Newer »
This thread is closed to new comments.
posted by TurkishGolds at 10:49 AM on March 2, 2023 [2 favorites]