I Chose a 7/6 ARM for My New Mortgage Loan. Here's Why

Recently, I applied for a mortgage loan to purchase a new home. When I did, I was given a choice of two different mortgage loan options: A 7/6 adjustable-rate mortgage or a 30-year fixed-rate loan.

A 30-year fixed-rate loan would have come with an interest rate that remained the same for the entire life of the loan. My payments and interest rate would never have changed. The 7/6 ARM, on the other hand, has a rate that's fixed for seven years. After that, the rate can change every six months (hence the name 7/6 ARM).

While the 30-year fixed-rate mortgage would have provided me with more predictable payments, I ultimately went with the 7/6 ARM instead. Here's why.

The interest rate was lower

One huge deciding factor for me was that the 7/6 ARM had a lower interest rate than the fixed-rate loan. Here were my two options:

• A 30-year loan with a rate of 6.375% and mortgage points equal to 0.087% of the loan amount
• A 7/6 ARM with a rate of 6.25% and no points

The 7/6 ARM provided a much lower monthly payment for me. Exactly how big was the difference? For each $100,000 borrowed, the 30-year loan would have cost me $499 in principal and interest per month. I would have also had to pay $87 per $100,000 of the loan value upfront to get that rate.

But, with the 6.25% rate, I would have a starting monthly payment of $493. Comparing interest over the life of the loan is not possible since I don't know which way rates will adjust, but from the start, the ARM is definitely noticeably cheaper since I'm borrowing more than $100,000. And I wanted to keep my monthly payment costs down since mortgage rates are high right now.

I plan to refinance my mortgage ASAP

Now, there is a risk of buying a home with an ARM. The loan cost often starts out cheaper, but since the interest rate is variable, payments could increase over time.

However, I did not mind taking that risk in this particular situation because interest rates are so high right now compared to where they have been in recent years. Rates are higher than they have been since the mid-2000s in part due to the Federal Reserve repeatedly raising interest rates since March 2022.

I believe rates are inevitably going to come down in the next seven years as the high rates have reduced demand for mortgage loans right now. Since I plan to refinance my loan anyway as soon as rates come down, I likely won't still have the loan when the initial seven-year period expires and my interest rate begins adjusting.

It made sense to me to take the chance of rates going up in exchange for getting the lowest possible payment now and avoiding the upfront cost of points, since I don't plan to keep the loan for the long term anyway.

Is an ARM right for you?

If you're in my situation and can get a cheaper loan by opting for an adjustable-rate mortgage, it may be worth doing as long a few things are true:

• You don't believe interest rates are likely to keep rising. There's no crystal ball that can tell you this. But you should look at the historical rates and read some expert commentary on how mortgage rates are likely to trend to make an informed choice.
• You can afford the monthly payments even if your rate adjusts up the maximum amount. Your lender must disclose how high your rate and payment could go. If that rate would be unaffordable for you, you can't take a chance on having to pay it. Even if that chance is slim, you don't want to be foreclosed on because you can't make your mortgage payments.
• There's no obvious reason you won't be able to refinance. For example, if you have reason to believe property values may fall and your home will be worth less than what you paid for it, you may not qualify to refinance.

By considering these issues, you can decide if an ARM is right for you as it was for me. Just be sure to give the decision careful thought, as your mortgage loan is going to be with you for a long time to come.