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Adjustable Rate Mortgages Are Awesome!

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When shopping for a mortgage, you have many choices, including typical fixed products such as a 30 or 15 year fixed mortgage, or more aggressive programs such as adjustable-rate mortgages, option-arms, and hybrid option-arms.

Considering the average time people spend in a home is roughly three or four years, why settle for a high-priced fixed mortgage? You can get a 5, 7, or 10 year hybrid arm that comes with a significantly lower interest rate, plus the safety of a fixed period for longer than you’ll likely stay in the home.

Even if you do stay in the home for longer than anticipated, you can always refinance into another option-arm or hybrid arm program and reset the fixed period.

Be sure to include an interest-only option on your mortgage as well. It makes no sense to pay down your principal. You’ll probably move out of the home in the next five years, and with market appreciation almost guaranteed, you’ll have enough equity to part with the home and still make a decent return.

Additionally, if you make interest-only payments, you’ll be able to invest the difference in the stock market and get a better rate of return than the 6% interest rate on your mortgage. During the 1990s, the S&P 500 provided an annualized return of 17.3%.

Better yet, you could get an option-arm that comes with payments as low as 1%. Sure you’ll experience negative amortization, which will eat away at your equity, but why pay the mortgage down when you make more money investing in stocks or other securities?

If you pay 1% on a $500,000 loan amount, the monthly payment is a mere $1,600 versus a monthly payment of $3,200 on a fully-amortized 30 year fixed program at 6.625%.

And all that interest is tax-deductible, so you’ll get it back in April. Any money paid towards principal is not.

Don’t believe what Suze Orman says, the choice is simple. Invest your money at a higher rate of return than your interest rate, using your home as leverage and you won’t be sorry.

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One Response to “Adjustable Rate Mortgages Are Awesome!”

  1. chris says:

    Yeah but you dont own anything, buy a home you can afford pay it off. then if you want another home, sell that one. this borrow, borrow, borrow stuff never gets you rich.


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