With inflation, interest rates have jumped up along with home prices. Historically, home prices go down when interest rates go up. When you hear the term housing bubble, that means home prices are inflated and the bubble may soon pop. This will send home prices crashing back down. If you really need to buy a home in current market conditions, consider an ARM.
An ARM, or Adjustable-Rate Mortgage is a loan with a variable interest rate that fluctuates throughout the term. Velocity Banking is a way to pay off your home in 5 to 7 years by using a revolving line of credit, saving you thousands of dollars in mortgage interest. When most people stumble upon Velocity Banking, they are already years into their mortgage and have missed the huge saving potential that comes from paying off their mortgage within 10 years of buying their home. An Adjustable Rate Mortgage may be the best fit for those refinancing or buying a new home with the intent of Velocity Banking or later refinancing when interest rates go back down.
The Customizable Mortgage Loan
A 30 year 10/1 ARM is a 30 year loan where you will have a fixed rate for the first 10 years followed by an annual rate adjustment. After 10 years, the annual rate adjustment may go up or down depending on market conditions. ARM rates are typically lower than the equivalent conventional fixed mortgage rate. You could be saving 0.25% or more on your interest rate by going with an ARM.
Think you can pay off your house faster? Try a 7/1 ARM or even a 5/1 ARM where you will get an even lower fixed rate for the first 5 years of the term. ARM loans can be quite complex as there are several contracts you can go with. In a 5/5 ARM, the loan rate adjusts every 5 years after the first 5 years. In a 10/2 ARM, the rate will adjust every 2 years after the first 10 years. Depending on who will service your loan, you can negotiate your own 5, 7, and 10 years fixed ARM’s.
Who Benefits From An ARM Loan?
The ARM loan is for those who can pay off their homes quickly and feel little to no financial pain in rising interest rates. It is suited to those who are financially healthy with steady income or multiple household income streams. ARM’s are also great during times of high interest rates. The initial fixed term will help you save, giving you the option to refinance if interest rates suddenly drop. ARM’s are perfect for people like myself who use the Velocity Banking strategy to pay off their homes as fast as possible. If you are new to the concept of Velocity Banking, follow my journey here and subscribe here to stay updated on my goal to finish paying off my mortgage by 2025 (7 years total). I provide spreadsheets, several posts, and examples on the velocity banking strategy.
Are The Risks High?
ARM’s have interest rate caps and payment caps. When you review your loan contract, it will tell you that your interest rate and/or payment will never exceed a certain amount. HELOC’s are revolving lines of credit with a variable interest rate. HELOC’s are very powerful tools for Velocity Banking and they also have interest rate caps. For example, my HELOC will never go past 7% APY and currently sits at 3.75% APY. If you are the head of your household or if your line of work isn’t stable, an ARM loan is not for you.
Why I don’t have an ARM Loan
ARM loans are not well known to the public. Many first-time home buyers go for a government insured mortgage like the FHA Loan that allows small down payments with the tradeoff of high interest and PMI (Private Mortgage Insurance). Other government insured loans include VA and USDA Loans. Most home buyers will just settle for a 30 year or 15 year conventional fixed rate mortgage without knowing about adjustable rate mortgage loans, jumbo loans, or government insured loans. I fell into that category.
Another reason why it would not make sense to get an ARM is your loan maturity. If you have already been paying off a 30 year mortgage for 7+ years, it won’t make sense to refinance(for most people). At 7 years into the mortgage, you would have already paid a huge bulk of the interest payments on your mortgage. When you refinance your interest will reset and you will go back to paying way more interest than principle with each monthly mortgage payment.
I refinanced my 30 year mortgage at 2.5% when I was 2 years into my 3.875% mortgage. I discovered the 7/1 ARM shortly after refinancing but found it did not make sense to refinance again because paying the refi fees twice ate away at my potential interest savings. When I pay off my home in 2025, I plan to buy a second home with a 5/1 ARM and turn my paid off home into an investment property. With $2000+ monthly rent income on top of our regular salaries, we should be able to pay off our second home within 5 years and benefit from the low rate of a 5/1 ARM.
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