My ARM percentage went down!

[riddler 0]

Seems like all we hear today is how bad the economy is, and how evil sub-prime lenders are the start of it all. But I'm here to tell you that ARMs aren't all bad, if you play it smart.

Nine years ago, I bought a house at a 7.5% fixed mortgage. Five years ago, interest rates were super low, so I refinanced to a 4% arm for three years. My thinking was I would sell the house by the end of three years anyway. Well, that was before I had two kids, I'm still in the house, and the ARM was set to increase last year.

Keep in mind that for three years my payments were cut by 1/3, and that alone adds up to about $20K in money I didn't give the mortgage company. Sure, they front-end load the interest, but the 75% increase in the equity over the last nine years more than makes up for the difference.

Last year, they were allowed to raise my interest rate, but under the rules, they go only go up a maximum of 2% per year, to 6%. Still less than the 7.5% I had originally, so I'm happy. I keep the mortgage for another year. No need to refinance, because the best rate I could get last year was 6.25%.

Now this year, it's scheduled to go up again, to a maximum of 8%, which isn't all that much higher than the 7.5% I started with, and I save about $25K in total payments to the bank over four years.

But I just got the letter from the bank saying they are LOWERING my rate to 5.875%. Holy cow! Earlier this year, they sent me an offer letter saying they would lock-in a fixed 6% for 30 years. I figured I would sell and not bother. But now, even if I don't sell, my mortgage payment is going down for a year.

My story is different than most, because a lot of people bought over-priced houses they couldn't afford on a sub-prime. But ARMs still have their place, and if you time it right, you can save big bucks.

Trapped on the surface of a sphere. XKCD

[RkyMtnHigh 0]

Based on the thread title I was going to suggest you eat more Spinach

That's cool about your Adjustable Rate Mortgage percentage being reduced. With the increase in foreclosures I suppose something needed to be done somewhere.

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[tigra 0]

Yup- not all ARM loans are evil and there is a place for them in the market. These days people tend to confuse the more conventional ARMs like yours with the less conventional ARMs- the ones where the interest rate adjusts more frequently than the minimum required payment. Those are the ones that can get you in trouble when you aren't paying attention.

[vdschoor 0]

Quote

Nine years ago, I bought a house at a 7.5% fixed mortgage. Five years ago, interest rates were super low, so I refinanced to a 4% arm for three years. My thinking was I would sell the house by the end of three years anyway.

The big difference between you and a lot of people that got an ARM is that ... you can afford your house when the interest goes (back) up..

A lot of people signed up for these loans where the ONLY way they could afford the house was if the interest stayed at this low rate.. thats where people and banks screwed up.

[riddler 0]

Quote

A lot of people signed up for these loans where the ONLY way they could afford the house was if the interest stayed at this low rate.. thats where people and banks screwed up.

Yup - that's why I say you gotta play smart. The problem with mortgages (BTW, the word mortgage means "death-pledge", you pay it or die) is that they are so complicated, most lawyers can't even understand them. Ask the average person who works hard for a living if they know the terms of their own mortgage, other than the interest rate, and most will probably say no.

I wouldn't buy a house on an ARM, but it is a great refinancing tool if you get a substantial drop in interest rates and you are planning on selling in a few years anyway. I would verify that rates change once per year, and there is a yearly cap on the increase. And if you still get stuck in the house, you have the option of refinancing again in a few years (not the best financial strategy, but it's an out).

Trapped on the surface of a sphere. XKCD