Given inflation and mortgage rates have gone up aggressively since August 2020, was getting an ARM back then a bad move? Maybe. But I’ll argue probably not. Let me reason why.

One of the best things about running Financial Samurai is having readers criticize my financial beliefs and actions. So long as the criticism is respectful, I find the criticism to be one of the best ways to learn. After all, if we’re stuck in an echo chamber, it’s hard to outperform.

Now that we’ve seen big rises in inflation and mortgage rates, I’ve received a couple of comments saying that I was wrong for sticking with my ARM recommendation call. It’s always easier to point out mistakes after the fact.

For reference, I’ve been writing about how an adjustable rate mortgage is preferable to a 30-year fixed rate mortgage since 2009, when the 10-year bond yield was at ~4%. I’ve actually held this belief since 2004, five years before I started Financial Samurai. Today, the 10-year bond yield is at ~2.85% after rebounding from a 0.52% low in 2020.

In other words, my public call to get an ARM and save on mortgage interest expense has been correct for at least 13 years. Could the 14th year in 2022 really be when I finally got my call wrong?

In the world of “what have you done for me lately,” let’s do some analysis!

Imagine getting a $55,077 mortgage credit rather than paying a mortgage fee to get a new loan. A $55,077 mortgage credit was what I was quoted for a $4.125 million, 10/6 ARM at a 3.625% rate. Surely receiving a large credit is better than paying a mortgage fee right? Not necessarily.

The higher the mortgage rate you are willing to pay, the greater the mortgage credit you receive. The reason is that the lender is making a higher interest rate spread off your loan.

Taking out a new mortgage at a lower 3.375% rate with only a $3,514 credit might be a more optimal decision for a well-qualified borrower. By saving $576 a month in mortgage payments, you will break even in 89 months.

You get 89 months by taking the difference in the credit of $51,563 and dividing it by $576. If you plan to hold the mortgage for longer than seven-and-a-half years, then you will come out ahead all things being equal. If you invest the difference with positive gains, you will break even sooner.

This is the traditional argument for why getting a lower mortgage rate with less credits may be better. However, there is another argument for why paying a small mortgage fee is better than getting a large credit. And I’m not sure most people know this. I didn’t until recently.

House prices have cooled and will likely decline in some of the hottest markets. However, on my quest to get financing to conquer my real estate FOMO, I realized a positive datapoint for the U.S. housing market. Well-qualified borrowers are paying much lower mortgage rates than the headline rates you see in the news.

There has been a ton of talk about how 5%+ interest rates for 30-year fixed-rate mortgages will really put a squeeze on buyers. If you have to go from paying 3.25% to 6.5% for a new mortgage, I’d believe it. However, I don’t think that’s exactly what’s happening for all borrowers.

Since the 2008-2009 global financial crisis, lenders have become much more strict. At the same time, borrowers have gotten much more qualified. I’ve refinanced multiple mortgages since 2009 and each time was more painful than the last.

Therefore, I doubt home prices will drop too much. A 5-10% decline seems reasonable. But for those cities with a surge in upcoming supply, the price drops could be more severe.

This post will show you how to reduce mortgage fees and get the best rate possible. I have been refinancing and taking out new mortgages since 2003. As a result, I’ve become an expert as squeezing as much value as possible out of every mortgage.

Fees are an inevitability. How do you expect anybody to make money without them? I have no problem paying a fee for services rendered. However, some of the fees we pay are often hidden, illogical, or excessive. 

To reduce mortgage fees, let me first explain what mortgage fees entail. I’ll also explain the point system and the incentive based pricing system.

Have you ever wondered what the difference is between a 5/1 ARM and a 5/5 ARM or a 7/1 ARM and a 7/6 ARM and so forth? Let me explain in this article because the difference adds to another dilemma mortgage borrowers should consider.

An adjustable-rate mortgage (ARM) is a home loan with an introductory fixed interest rate upfront, followed by a rate adjustment after that initial period. The introductory fixed interest rate period is signified by the first digit, i.e. 5-year fixed-rate period for a 5/1 ARM.

The fixed-rate period after the initial introductory period is over is signified by the second digit, i.e. 1-year fixed-rate period for the new rate for a 5/1 ARM.

The primary difference between a 5/1 and 5/5 ARM is that the 5/1 ARM adjusts every year after the five-year lock period is over. Whereas a 5/5 ARM adjusts every five years.

Given we know ARMs make up only a tiny portion of total loans, ARMs with an adjustment fixed-rate period of more than one year are even more rare. But let’s discuss anyway.

Since 2009, I have encouraged Financial Samurai readers to take out an adjustable-rate mortgage instead of a 30-year fixed-rate mortgage. The rationale was that we were in a downward interest rate channel, so why pay more in interest if you don’t have to?

Further, the average homeownership tenure back in 2009 was only around 5-7 years. Therefore, it was illogical to take out a more expensive mortgage for a much longer fixed-rate duration. Today, the average homeownership tenure is 10+ years given the desire for real estate has boomed.

Because I practice what I preach, I’ve taken out multiple adjustable-rate mortgages (ARM) over the past 13 years, thereby saving well over $300,000 in mortgage interest expenses. In fact, my existing primary residence mortgage is a 7/1 ARM at 2.125% taken out in 2020. Score!

However, while all this time I had thought I had been making a difference by helping people save money on their mortgage expenses, it turns out, my message had been ignored and fallen on deaf ears!

You may want to pay down extra principal to qualify for a mortgage refinance. When mortgage rates are low, paying down principal to qualify for a lower mortgage rate is a smart move. The return on your capital could actually be quite high.

Let me share with you an example of when paying down mortgage principal to qualify for a mortgage refinance made sense.