With interest rates remaining near historical lows, it’s no wonder that many buyers are looking to lock in a 30-year fixed rate mortgage for their property. What’s there not to love, right? The guarantee of cheap money for the next three decades: hooray! However, if you think your likely ownership of the property will last no more than 5-10 years, it may be worth considering a shorter product like a 5 or 7 ARM (Adjustable Rate Mortgage). Why? First of all, the rates are even lower. Unless you’re looking to keep the property for investment purposes after you move out, why pay more in interest for a 30-year term that you won’t use? Second, an ARM is still amortized over 30 years just at a lower rate, fixed for a shorter term.
Further, if you happen to be among those who still receive chunky year-end bonuses, it behooves you to consider interest-only ARMS. Not only do you get to pay only the interest portion of the loan (you already pay mostly interest for the first years of a 30-year mortgage anyway) but your payments readjust each time you use that bonus to pay off a portion of the principal. Most buyers’ cost of ownership could be cut almost in half by opting for an interest-only ARM versus a 30-year fixed product. On a $1 million mortgage, monthly payments for a 3.5% 7/1 IO ARM would be $2916 versus $5066 for a 4.5% 30-fixed. While this doesn’t make sense for everyone, it pays to consider all options before landing on one product.