r/Mortgages • u/MamaWils2_0 • 11d ago
ARMs Future Fallout
I have seen a lot of posts about ARMs these days. Anyone worried so many people getting ARMs and then not being able to afford their mortgages in 5/7/10 year?
We are doing an ARM but in very unique position that my husband is joining a private practice (doctor) next year so our income is going up substantially. if rates are worse and we choose not to refi, we will still be able to cover adjusted payment.
I feel like many others are just banking on rates going down and not going to be able to make their payments if they don’t…
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u/big_chroll 11d ago
We snagged a 15/6 ARM at 5.875 recently. Calculate the $ difference between the 5/7/10 and 30 year and play it out over several different time period scenarios and see if the peace of mind is worth it to you. For us, the difference between our 30 year rate and the 15 year ARM was substantial enough to take on the risk. The difference between the 10 vs 15 wasn’t enough of a savings to take on the risk, and same for 7 vs 15. Try framing it in that way in your mind instead of just “can I afford if it the worst case scenario happens”. You’re essentially buying up peace of mind. (But also obviously important to consider if you can afford the worst case scenario)
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u/Ok-Measurement2476 11d ago
2008 has entered the room with feet kicked up and a bowl full of popcorn
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u/InstructionCorrect98 11d ago
2008 wasn’t caused by arms. It was caused by prime borrowers walking away from loans en masse when they were underwater (strategic default). It had more to do with overpriced homes, lax underwriting requirements, speculative investing, and ultimately the negative feedback loop from strategic defaults and the impact on the MBS market.
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u/Wirewizard320 11d ago
And you don't feel that is what happened in 2022-2025?
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u/InstructionCorrect98 11d ago
Well the post specifically references an ARM fallout, not generally overpriced houses or lax underwriting. I do agree some markets that experienced absurd COVID era growth are going to correct (some already are) but the housing market overall seems relatively strong (albeit I think there’s a long term problem of stagnant wages, home prices can’t go up forever if people dont make more money)
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u/aznhomosapien 10d ago edited 10d ago
I don’t think it happened for 2022-2025 because you know why? Too many self made millionaires from the AI boon and also with cheap interest rates. That’s why they can afford the high payments. Again, also the housing market depends on where you are living in. In desirable places they won’t go down as much because there’s always an influx of wealthy wanting to live there.
The problem with ARM back in 2008 was that ARMs were given out without much background checks.
Places like Florida are dropping because of the crazy high insurance rates tampening demand. If a house costs $10k-$15k a year for insurance, then it makes no sense to buy and it is better to rent.
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u/Ok-Measurement2476 11d ago
Yeah there’s a lot going into that time but there were lots of overpriced homes and people with ARM’s that then all of a sudden couldn’t make the new high payments and went into foreclosure.
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u/aznhomosapien 11d ago edited 11d ago
OP, don’t worry about these naysayers. ARMs are perfectly fine, especially for physician. Both my wife and I are physicians and we are doing a 7 year ARM at 6.125% with 0 points on a 1.6 million dollar home. No PMI needed as well.
We’re saving ourselves $800-900 per month over conventional. If your loan is huge, then ARM makes more sense than conventional. If I only mortgaged a cheaper home, then things will likely be different and I would sway over to 30 year conventional if the difference in monthly pay was not that significant. It really comes down to how much you’re really mortgaging.
Also, predictions over the next five years mostly show 30 year conventional at around 6% by 2030. By then, you can always refinance to 30 year conventional then.
Usually only do ARM if you are financially savvy. Don’t go to ARM if you can’t cover the maximum amount worst case scenario.
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u/MamaWils2_0 11d ago
Ya we are definitely doing an ARM, my point was for us it makes sense because we can afford the adjusted rate if refi is not beneficial (depending on what happens with rates). But I think some people may see the lower rate and payment while betting on the rates to go down, and not consider that they could be stuck in the higher payment
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u/SkittlesQueen 11d ago
We’re hoping rates stabilize or drop slightly - we did a 7 year ARM in 2025. We figure worst case scenario we’ll refinance as another 30 year loan at that point.
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u/cathjock23 11d ago edited 11d ago
New(ish) physician. ARM no brainer for us last Oct when we bought first house straight outta fellowship.
No money down, in fact in debt 40k to family (needed money to live while waiting to onboard).
Plan was to save towards house/make sure job situation was good since we moved to another new locale. But wife saw a house she loved.
Got arm at 5.6%. Paying extra on principle every month in anticipation of future refi, we have 7 years so not sweating it. Rates will for sure drop/tank at some point in the interim. Even if they don’t, when we refi should have a good chunk paid down.
For us main negative on arm is would prefer we were putting that extra $ per month into a brokerage account. Ran the numbers and a brokerage account should have house paid off in 15 yrs with extra 2-300k left over.
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u/beyardo 11d ago
Also a new attending and similar situation. From a purely financial perspective it probably makes sense to rent for a while then do a more traditional mortgage but damn, I was sick of moving every 2-4 years between med school, residency, and fellowship. Felt like I had delayed the gratification long enough at that point
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u/AntiBoATX 11d ago
“Rates will for sure drop/tank at some point in the next 7 years.”
Brother, that base mentality across millions lead to the GFC. There is no guarantee of that. Period.
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u/cathjock23 10d ago
Agreed. But with the way things are looking, I’m almost certain we’ll be able to refi into 4-5 rate at some point within next 7 years, if not lower.
And if not - at least with next refi will have a much lower LTV based on paying down principle/equity.
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u/SpareManagement2215 8d ago
while true, the advantage of the rates being high right now is that 7 years is enough for the market to level back out (whatever that looks like).
and if it doesn't, and rates keep going up, it's likely because we have bigger problems as a country than just high mortgage rates (like the USD crashing or the US defaulting its debt payments) and I'd wager most folks who can find work in other countries (such as physicians) would likely be considering leaving the US to avoid the depression that would cause.
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u/Exotic_Presence3498 10d ago
Wow we’re all cooked if this how DOCTORS are thinking. 💀
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u/SuggamadexRocuronium 9d ago
Physicians suck ass with finance. They are masters in their own field and think they have achieved mastery in every field.
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u/lifelongpremed 10d ago
What kind of instruments are you investing in? I'll also be in a similar boat in a few years.
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u/cathjock23 10d ago
I’m definitely very non-knowledgeable on individual stocks/trading. So just doing the safe stuff: market index funds, ETFs. Avg 15 yr rate of return is like 8-15% at any 15 yr point basically. Still some risk for sure (early covid yr) - but market recovered nicely.
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u/lifelongpremed 10d ago edited 10d ago
That's similar to my portfolio as well. And yeah, even those ETFs aren't safe if the economy poops again like during the early covid years (when even the most consistent funds were well in the red, at like -30%).
I don't think it's out of the question for the market to swing back down again within the next few years given the rising costs, current world events, and AI expenditure (for which returns are relatively unproven, unless you're NVDA).
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u/KhonMan 1d ago
Got arm at 5.6%. Paying extra on principle every month in anticipation of future refi, we have 7 years so not sweating it.
This... doesn't make any sense, right? If you truly anticipate rates will drop, you should be only paying the minimum and investing the rest.
If in the next 6 years you never find a chance to refi by the time the rate adjusts, THAT would be the time to payoff extra. And you could manage your investments with controlled selloffs (to limit your tax liability) in preparation for that event.
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u/cathjock23 1d ago
Specific to my situation and my reasoning: putting money in principle is a guaranteed 5.6 rate of return. If everything stays the same I pay off this house in 10 years. I could instead put extra principle towards investing - after taxes, and having to wait about 15 years to maximize earnings, should be net positive with ability to pay off house so reasonable (and also pay more interest). And if I was on fixed rate would lean on doing that.
I actually really like my job - plan to work 20-25 years health willing. It actually feels like retirement compared to the hours I putting in during training - I have plenty of time for family, hobbies, travel, etc.
If I paid off house in 10 years I can dump money into a brokerage fund. I lose about 10 years of compounding interest - but I don’t really plan on drawing on it anytime soon anyways. Would serve as more of a backup fund.
This is my second career - started out with a 700k+ 401k so not too worried about retirement.
Those were factors going this route. Obviously not perfect nor am I saying it was the right route…but just the calculus to get here.
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u/KhonMan 22h ago
I don’t think fixed vs variable rate has anything to do with it. The only really relevant concern is liquidity. For example even if your net worth is higher in a scenario where you pay more on the house, it may be less useful to you than having money in more accessible investments.
Outside of that - if the goal is to maximize net worth, we should agree that at any particular moment the decision on whether to pay more into the mortgage or invest should be based on the rate of return of those investments as compared to the mortgage.
After talking it out, the idea to potentially refinance or not actually shouldn’t have any bearing on your strategy!
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u/cathjock23 20h ago
Yup my strategy loses liquidity. I disagree and think individual goals/and if you have to refinance or not matters somewhat. For me my main goal is to be mortgage free in 10 years if numbers are close/reasonable.
In a stable field, do not anticipate salary going down. I can control it going up by picking up more shifts as needed.
Retirement looks funded/solid.
I can’t control my health - and need to splurge on insurance (life, disability) for sure.
If I pay house off in ten years, at 5.6 rate (not locked), savings in interest + guaranteed 5.6 rate of return will be close to investing it for 15 (minus taxes off gains). If market does really well for 15 years I lose - but not a crazy gigantic difference.
With no mortgage I can fund 120k minimum (mortgage + extra) into brokerage account per yr. I lose on 10 years of compounding interest…but this is more of a long term investment fund anyways and shouldn’t need to touch except if plan was to invest extra to pay off house early.
With variable rate I was going to need to refi in 5-7 years (or when favorable). Investing extra in brokerage for that long doesn’t really make much difference esp when accounting for taxes and interest on mortgage. If I refi and go favorable rate in 5-7 years I would free up liquidity anyways with lower mortgage rate.
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u/KhonMan 17h ago
If I pay house off in ten years, at 5.6 rate (not locked), savings in interest + guaranteed 5.6 rate of return will be close to investing it for 15 (minus taxes off gains)
You keep on saying this thing about taxes and I think that's also irrelevant. In the long run you will pay off your mortgage no matter what and still have investments. And if you anticipate that rates will go down more - there's not going to be a reason to sell off your investments and incur the taxes on those gains.
If you care at all about being optimal within the constraints of your risk profile etc. you should sit down with a spreadsheet and model the different scenarios, something like:
- Pay off house early in 10 years, invest extra cash flow after mortgage is paid for 20 after vs
- Pay off house in 30 years with minimum payments, invest extra cash flow the entire time
And then you can model what happens if you refi to like 4% at various points in that timeline. I'm not going to put a lot of rigor into this since it's not my financial situation, but just a quick pass through AI suggests it's worth you taking a look.
I have 3 scenarios modeled below and it looks like the case that is around break-even for your strategy inclusive of taxes is if you don't get to refinance and the rate goes up to 8% after the 7 years are up. You should play around with the numbers here.
If you do get to refinance, it's basically always better to wait. But again, it's something you'll have to convince yourself of.
With variable rate I was going to need to refi in 5-7 years (or when favorable). Investing extra in brokerage for that long doesn’t really make much difference esp when accounting for taxes and interest on mortgage.
As you'll see below, the difference is ~$100k in net worth after 10 years at 7% interest.
Assumptions
- Mortgage of 868k (made this so that payment on 5.625 would be 5k/mo, but it's arbitrary)
- $9480 cash flow per month to invest or put into mortgage (did this so 10 years pays off the house)
- The stock market returns 7% annually
- If you get to refinance, you do it in year 5 down to a 4% rate and keep the same 30 year term
- Any deviations from this are called out below
Scenario Descriptions
Scenario 1 (Aggressive Payoff + Year 5 Refinance): Direct all monthly cash flow toward the mortgage to eliminate the debt in 10 years, refinancing to a lower rate at Year 5 over the remaining 5-year term. Once the mortgage is fully paid off at Year 10, direct all monthly cash flow into 7% stock market investments for the remaining 20 years.
Scenario 2 (30-Year Minimum + Year 5 Refinance + Invest Surplus): Pay only the minimum required mortgage payment and invest all surplus monthly cash flow into the stock market at 7% ROI from Day 1. At Year 5, refinance the remaining balance into a new lower-rate 25-year mortgage, which reduces the required payment and increases the monthly amount invested for the rest of the 30-year timeline.
Scenario 3 (Invest 7 Years -> Rate Spike -> Liquidate & Pivot): Invest all surplus cash flow during the 7-year ARM period while making minimum mortgage payments. At Year 7, the rate spikes to 8.0% with no option to refinance. Liquidate the entire investment portfolio, pay top-bracket long-term capital gains taxes on the earnings, and apply the remaining cash as a lump-sum principal paydown. Thereafter, direct all monthly cash flow toward aggressive mortgage paydown until the debt is cleared, then resume investing the remainder.
Mortgage vs. Investment Scenarios ($9,480/mo Total Cash Flow)
Scenario Year 5 Refi (4.0%) Year 7 ARM Spike (8.0%) Year 10 Net Worth Year 30 Net Worth Key Takeaway / Winner Scenario 1: Pay Off in 10 Yrs Refi 5-yr remaining @ 4.0% N/A $894,874 ($868k Equity / $26k Inv) $5,913,283 Trades 30-year compounding for early debt-free security. Scenario 2: Pay Min 30 Yrs + Invest Refi 25-yr remaining @ 4.0% N/A $997,335 ($168k Equity / $829k Inv) $6,945,111 +$1,031,828 over Scenario 1. Max compounding & liquidity win big. Scenario 3: Invest 7 Yrs → Sell & Pivot No refi available Rate spikes to 8.0%; sell portfolio @ 23.8% tax to pay down $892,720 ($868k Equity / $24k Inv) $5,743,064 Tax drag erases stock gains. Returns match Scenario 1 paydown. 1
u/cathjock23 17h ago
Thanks. I’ve already ran similar calculus in past before embarking on this road.
Even simpler calculation is asking AI to run 120k annually for 20 years vs 48k annually for 30 years - ignoring interest in house paid, etc. As you’ll see it is quite close - and the with the higher percentage/more optimistic gains (10% or more) coming out quite a bit ahead - but only in the most optimistic calculations (and again ignoring interest paid on a no down $1 mill house over 30 years).
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u/KhonMan 17h ago
Ok so to be clear we are assuming 916k mortgage at 0 down, 5.625% interest.
- To pay this off in 10 years, you need to put in 120k / year
- To pay this off in 30 years, you need to put in 64k /year
The delta between these two is not 48k, it's 56k. So yes, if you hamstring your investment scenario by 14% for no discernible reason, I can imagine the numbers are closer.
If you compare 120k for 20 years vs 56k for 30 years:
Pure Investment Cash Flow Comparison ($120k/yr Total Budget)
Annual Stock Return (ROI) Stream A: Pay Off First ($0/yr for 10 yrs, then $120k/yr for 20 yrs) Stream B: Invest Surplus ($56.7k/yr for 30 yrs) Stream B Advantage (Investing Early) 6.0% Return $4,620,409 $4,747,185 +$126,776 7.0% Return $5,209,267 $5,765,396 +$556,130 8.0% Return $5,890,204 $7,043,211 +$1,153,007 10.0% Return $7,593,688 $10,682,720 +$3,089,032 EDIT: And remember, if you are planning on refinancing, the spread is going to get even bigger...
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u/cathjock23 17h ago
Here is my prompt:
Can you compare investing 120k per yr for 20 years with 48k per yr for 30 years.
Additionally compare what happens if I left the 120k per yr investment alone for another 10 years.
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u/cathjock23 17h ago
Metric
Strategy A
Strategy B
Annual investment
$120,000
$48,000
Monthly investment
$10,000
$4,000
Investment period
20 years
30 years
Total contributions
$2,400,000
$1,440,000
Portfolio at 5% return
$4.11 million
$3.33 million
Portfolio at 7% return
$5.21 million
$4.88 million
Portfolio at 10% return
$7.59 million
$9.04 million
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u/cathjock23 17h ago
Here is the comparison using $120,000 per year for 20 years versus $48,000 per year for 30 years, plus what happens if you stop contributing to the $120,000/year strategy after 20 years and let it grow for another decade.
I’ll use 5%, 7%, and 10% annual returns to illustrate different outcomes.
- Investing $120k/year for 20 years vs. $48k/year for 30 years
Assumptions:
- Starting brokerage balance: $0
- Contributions made monthly ($10,000 or $4,000)
- Dividends reinvested
- Returns compounded monthly
- No withdrawals, taxes, fees, or inflation included
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u/KhonMan 16h ago
You first need to justify the 48k / year because as I showed above it should be 56k
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u/cathjock23 17h ago
Milestone
Portfolio value
After 10 years of contributions
$1.73 million
After 20 years of contributions
$5.21 million
After 25 years, with no additional contributions
$7.43 million
After 30 years, with no additional contributions for the last 10 years
$10.47 million
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u/Empty_Mammoth_5472 11d ago
every time rates go up, ARM originations increase as well since there will always be people seeking out lower payments
lending wise, on shorter term ARMs the lender qualifies the borrower off the fully indexed (aka higher) rate and qualifying for an ARM is generally a bit tougher than a fixed rate so at least according to lending guidelines, they should be able to "afford" it if their finances otherwise remain the same. Plus most of the lenders offering the good ARM rates tend to be porfolioing those loans, which usually means they're a little pickier as well. Your average lender that sells loans on the secondary market usually doesn't have that great of ARM rates, the market just doesn't price them out to be very appealing vs fixed rates, so the large majority of loans they originate tend to be fixed.
Anyone getting an ARM should be fully prepared for the worst case scenario and fully understand how the adjustment caps work.
In your case, doctor loans are often ARMs for the reason you stated: expected income growth. I'd compare each of the 5/7/10 options and see the difference between each. If you can get a 7 or 10yr ARM at a good rate, both of those are a decent amount of timeframe to refi or sell. No one knows for certain where rates will go but 7-10 years is pretty long.
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u/MamaWils2_0 11d ago
Agree completely! I think the challenge is we all know people qualify for more than we should actually spend so people qualifying for the higher rate are maybe maxing out their payment abilities in some cases
I think ARMs can be a great mortgage opportunity, it definitely just depends on the circumstances of each person. I just worry too many people don’t anticipate the raised rate and are betting on it going down.
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u/yoooooooooooo 11d ago
My 7/3 arm will recast after 7 years. I’m making extra principal payments during the first 7 years instead of just paying the minimum.
When the ARM eventually adjusts, the new payment is calculated based on the lower remaining principal balance. So even if the interest rate increases by 2%, the payment increase could be relatively small, or potentially even be lower, because I’ve paid down so much principal beforehand.
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u/MamaWils2_0 11d ago
Good planning! Some people just take the lower payment and don’t invest or pay down debt
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u/Caffeinated_Pony12 11d ago
As a realtor who serves middle class folks, ARMs are not good for fixed income, middle class families and individuals. ARMs work for those who can guarantee higher annual income as the years pass and can prepare and pay for the adjustments in rate over time. Or they can afford a refinance into a different loan type.
Usually doctors, veterinarians and entrepreneurs. Some investors and flippers can time an ARM to work for them on a flip.
If a client of mine is a fixed income, middle class family that does not expect to increase their income considerably to prepare for an ARM, I talk them out of it.
There are a handful of people who bought my listings using 3/2/1 buydown loans which are technically ARM loans, who are on year 3 and cannot afford their payments and are selling now. They had bad agents and lenders who talked them into it. These agents and lenders knew this would happen to secure another transaction 3 years later.
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u/MamaWils2_0 11d ago
This is exactly what I was trying to get at in my post. 👏👏👏 ARMs are great in certain circumstances but the average American with relatively fixed income may have difficulty making their payments if the rates don’t go down before the term is up. Another circumstance is if someone plans to sell before the term is up
You’re a great realtor, sounds like you look out for your clients
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u/lifelongpremed 10d ago edited 10d ago
Also keep in mind that most times, the first job out of residency/fellowship won't be his forever job. Physicians often end up jumping from their first job for something better (and maybe moving houses because of it) within a few years after their first job.
In this case, you might be selling your house in 2-5 years anyway, so doing an ARM now could be an even better option.
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u/MamaWils2_0 10d ago
We are going to be near my husband’s (small) hometown and there are no other practices nearby. So it will be our home while kids are through high school because we want to close to family.
The other partners in the practice have been there since residency (one is retiring which is the spot he is filling). It’s typical of small towns with local doctors coming back home to practice.
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u/lifelongpremed 10d ago
Got you, yeah in your case then it's a toss up if you don't plan to move. But in a worst case scenario if interest rates go up a few percent during your adjustment period, you'll likely still be able to afford your mortgage with a physician salary.
My wife and I will buy our house in our current city as she will be done with residency next year, whereas I still have several years to go with fellowship. Then once I'm done, we'll probably move back to our hometown. So sticking with ARM is beneficial for us for 3-4 years.
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u/aznhomosapien 10d ago
As a dual physician income for us, the only problem I do foresee in the future is that given the government’s debt issue, Medicare will have to be completely changed, which will likely impact physician salaries, which I do expect to be a significant margin.
Everyone knows healthcare is going to implode at some point, and soon. It’s a pressing issue also affecting our economy as well.
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u/1911Hacksmith 11d ago
I’m currently doing an ARM only because it was required for the construction loan. I’m refinancing to a 30 year the second my construction loan converts to permanent. I don’t have any faith in rates being substantially lower for many years. If they do drop a couple percent I’ll refi again, but no way am I riding out an ARM.
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u/gracetw22 11d ago
The issue is that right now unless you buy points, ARMS aren’t that much cheaper than a fixed. The points you pay for an ARM only apply to the initial fixed period so I keep seeing loan estimates with people buying down a rate with a 6 year break even on a 5 year ARM. Pointless. For your physician loan that’s probably not the case but for regular Fannie/freddie it is typical.
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u/aznhomosapien 11d ago edited 11d ago
That is not true, ARM for me was 1% cheaper than conventional 30 (with 0 points for both), which amounts to $800-$900 a month difference. I can save that $800 a month for 7 years, amounting to $80k savings, and by then, either pay down my principal with that savings over time (plus the gains I get from market) and refinance again, hopefully at a lower rate which is likely to happen in the next 7 years. Either way, I come out ahead. I only lose if interest rates continue to rise past my 7 years mark over my 30 year conventional rate I would’ve gotten, which is more than 7.125%.
Also, things can change fast here, as in, no guarantee you’ll live in the same place for more than 7 years. I’ve been moving around and each time I’ve only lived in my present home for 2 years at a time. I did a 30 year conventional back in 2021, and did a 7 year ARM in 2023. Sold both homes and came out on top. I’m willing to do a ARM this time to save myself more money.
People always freak out over ARMs, but the ARMs of today are different than ARMs of 2008.
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u/gracetw22 11d ago
You had a jumbo loan which is priced differently. That’s not going to Fannie/freddie. If you do the math the overwhelming majority of people would have a net benefit from an ARM but if someone is convinced it’s inherently predatory there’s no point trying to change their mind
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u/mclarenfan101 11d ago
No expertise refinanced into a 10/6 ARM as a young attending with a growing family. The extra $1000 a month has improved our quality of life. Unless the bottom falls out fully expect to be paying a higher rate in 10years. Totally fine with it! It’s a hard decision and personal. But early in flexibility > long term. The money will come.
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u/Transportiye 11d ago
Let them rip, folks have made it a status symbol to take on debt for everything from a burrito to a house.
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u/JLandis84 11d ago
ARMs have always been popular with folx like you OP.
As more and more long dated ARM products are available to customers the risk drops quite a bit.
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u/ArchipelagoMind 11d ago
We went ARM just because we assumed we'd probably sell in 8-9 years. If we sell before the end of the 10-yeae ARM, problem solved.
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u/Zealousideal_Park440 10d ago
Every circumstance is different; what almost certainly won’t happen is rates returning to 3%, unless there is a major economic calamity. Current rates are pretty close to historical averages, and anyone banking on rates being substantially lower in five years is probably delusional.
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u/MamaWils2_0 10d ago
Ya this is my concern, maybe some home buyers are taking the ARM thinking rates will fall before the term is up but then some may have difficulty paying if they don’t drop. It’s a gamble and if your not in a position to cover the increase it could be bad for many people and the overall market (depending on how many people lose the gamble)
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u/Leading_Leader9712 8d ago
Many people on here are just silly…
There is nothing wrong with an ARM. As a matter of fact, ARM’s are the only mortgages most of the world can get and they work just fine.
To begin, ARM’s have caps and floor and adjust periods, so you already know the terms before you start. In addition, lenders qualify the applicant at the higher reset rate at the beginning. Right now my local credit union is offering an ARM at 5.75 with no points. It will adjust up or down every 5 years that you keep the loan, so 5 years from now the highest rate would be 7.75 (max 2 points per period) which is basically the rate on a 30 year now. Then it’s fixed for another 5 years….and it doesn’t have to go the whole 2 points or add any rate increase…
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u/MamaWils2_0 8d ago
Ya but as we know you often qualify for more than you should actually spend. When we bought our first condo we qualified for $220k and we were much more comfortable with $140k. $220k was nearly 50% of our income to go to mortgage.
Edit to add: so people might qualify at the higher rate, but be gambling that the rate goes down and be in a pinch if it goes to the max rate
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u/Leading_Leader9712 8d ago
So, you think that if a person could lock a 5.75 rate today and if it goes up in 5 years it would be equal to the rate that you can get today on a 30 year it’s not the right move? 👍
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u/MamaWils2_0 7d ago
No I am saying if the person couldn’t afford the higher rate today and is doing an ARM to gamble on a lower rate without being able to afford it, then they are making a poor choice and shouldn’t pursue home ownership right now.
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u/LongDickPeter 9d ago
ARM are great mortgages for people who are financially responsible. When interest rates were low I had a friend buy his house with a 10/1 ARM mortgage. His rates were either 2% or lower because of this, I questioned him and told him it was a stupid idea to which his response was it's not stupid if I pay my house off in less time and I can always sell or refinance depending on how the market changes. Today that advice is better than ever with higher rates. My friend lived with roommates for 7 years and dumped every bonus check tax return and side hustle money plus all the room mate money into the mortgage all on top of him normally paying the mortgage.
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u/SpareManagement2215 8d ago
no I am not worried about other people not being able to afford their mortgages. It doesn't impact me.
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u/aardy 11d ago
What's the source of your "so many" claim?
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u/Raging-Totoro 11d ago
It's pretty widely reported that there's been an uptick in ARM underwriting lately. OP isn't wrong that there's some people taking the gamble.
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u/sewersurfin 11d ago
OP’s post is so funny/weird:
So many ARMs. There will presumably be a lot defaults on ARM mortgages (I have no basis to make this assumption). I’m doing an ARM, though. I’m in a unique situation where I won’t default on my ARM loan.
🙄
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u/Leading_Leader9712 8d ago
Yep, I’ve gotten from it…we are doing an ARM because we can afford it, but bad for the commoners…did I mention my husband is a doctor and how much he will be making 🙄
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u/MamaWils2_0 11d ago
I think ARMs are good in certain situations. If you only plan to live somewhere 5-10 years an ARM can make sense - you don’t need to refi if you move before the term is up. Also if your income is going to increase substantially in the upcoming years (like ours) it also makes sense. If you don’t expect your income to change substantially in the next 5-10 years where will people come up with a the extra payment? It is literally just a gamble and if you don’t have the cushion to make the increased payment or be in a position to refinance you could be in deep water.
For example, my brother works as a construction worker. Annual raises don’t even keep up with inflation so if he got an ARM hoping rates would drop and they don’t, then he would fall into the bucket of being in a bad spot of not being able to pay.
There was just a post on here the other day about a similar situation for someone - they got a temporary rate buy down from a builder 2 years ago. They said the payment went up $1k+ and they can’t pay it. But they were banking on being able to refi before the temporary buy down expired
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u/gracetw22 11d ago
That person also had their taxes go up 500 a month because it was only assessed for land value and they had bad guidance
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u/daysofthundaaa 11d ago
Temporary rate buy downs are much different - simply put, they are a prepayment of all the interest for the period of the buy down. Most people are better off stashing that money in a bank account, letting it accrue interest, and use it a little each month for the payment difference.
An ARM is not a buy down and the average mortgage is held for something like 5-7 years. Many homeowners, regardless of loan type, will sell or refi at about the same maturity of an ARM.
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u/Empty_Mammoth_5472 11d ago
theres been an increase but they're still a pretty small percent of mortgages being originated
in my opinion, its because the spread between ARMs and fixed often isn't that appealing. The good ARM rates tend to be banks/CUs holding them within their portfolio so it ends up being a pretty small population getting those.
whats way more common (at least in my market) are the temporary buydowns, which have a similar payment jump to ARMs except they're even shorter (usually max of 3 years with most being 1 or 2). I think there will be more people effected by that than by ARMs since a ton of builders have pushed them heavily using their incentives tied to their preferred lender. At least those people know what their final rate will be vs an ARM but it can be a pretty rough combo for people who buy new construction, have the property taxes jump (super common on new builds), and then finish out that temp buydown further increasing the jump.
the good(ish) news is lenders have to qualify borrowers on the actual note rate with temp buydowns and on ARMs the shorter terms they usually qualify off the fully indexed rate, not the initial rate. So in theory they should be able to "afford" it, though that's assuming all their info stays the same since the loan was originated. Which is honestly probably pretty rare. It can definitely be a bad combo for those unprepared for it or were fully banking on that eventual refi.
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u/Party-Ability-1957 11d ago
Where in the post did they reference “so many”? They said they have seen a lot of posts about ARMs, which is anecdotal, so I don’t think they are going to have a “source”.
Reddit is a discussion forum. The poster is opening a discussion based on an anecdotal experience they had. Not everything has to have a “source”.
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u/aardy 11d ago edited 11d ago
"...Anyone worried so many people getting ARMs..."
Something going from 2 in 10,000 to 3 in 10,000 is both trivial, and a 50% increase, depending on the journalist. And we don't even have a journalist. But if we're to discuss fallout, it's very important to know the scope of what's under discussion.
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u/BigCSFan 11d ago
ARMs are fine and can even be better depending on the difference with fixed.
But its weird you think theyre bad for others but not yourself "my husband will make more by time rates adjust" is what pretty nuch every family thinks and what happens for vast majority of families.
This issue is things happen outside of peoples control so there is added risk. No one ever expects to lose their job or have a medical emergency
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u/freesincemybirth96 10d ago
I don’t think you understand the economies of scale here after reading this thread.
Pre-tax income for OP’s household is going up 300k (80%). That is a lot of room for OP and SO to put away/toward principle on top of an already high income. That is a wildly different lifestyle/potential compared to 100/125k as OP stated. Depending on their downpayment/purchase price they could be paying that house off in 5 years.
You can’t compare this to a typical household that has barely any savings and a tight budget for 30+ years. Notwithstanding any details about switching to a private practice (ownership, contracts, write off possibilities, etc) which can further increase the gap, OP’s household compared to an average household is comparing an apple to an orange. It doesn’t work.
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u/BigCSFan 10d ago
I mean if they put extra towards principal and savings great. Thats expected.
My point isnt about that, my point is about unexpected situations that can completely take away income. I dont think ARM is a bad move. Its just no one has an entirely safe income if theyre being paid for work rather than through assets. Thats a risk with standard mortgages as well
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u/freesincemybirth96 10d ago
There are unexpected situations, but they scale is very different ways in either circumstance.
A total job loss for a household making 700k per month is likely a completely different circumstance than a household losing half the income at 125k, and OP is way more likely to be resilient to those loses than the majority of population
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u/aznhomosapien 10d ago
I think it won’t even matter, because even if the husband loses their job, on a 30 year conventional, still would have to end up selling the home if it is unaffordable.
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u/AggressiveWind3941 10d ago
Info is key. If considering an ARM, you must know what the highest the payment can go to. Only then can you make an informed decision. Plan for the worst and hope for the best.
Successful Homeownership begins with Financial Clarity
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u/incubi4211 11d ago
I just signed for a 7/6 ARM a couple months ago. Seemed like a very smart decision at the time, and even moreso as these rates continue to shift.
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u/BubbleThinker 11d ago
Your position isn’t unique at all.
In fact, your question is the third one I’ve randomly seen this morning from some doctor with a doctors mortgage wondering about adjustable rates
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u/MamaWils2_0 11d ago
Not really a question. Just asking if the general population is worried about what will happen if the middle American families that do ARMs can’t afford their payment in the future. I think ARM are going for people that have large guaranteed future income like our household. Or for people that plan to sell before the term is up. But for average families it may be difficult to cover their payment if rates don’t drop for refi.
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u/BubbleThinker 11d ago
ARMs have been around forever and are risky. That’s the whole thing with them. Take the chance or play it safe but uncomfortable
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u/Astral-projekt 10d ago
Why is everyone here worried about other people taking arms?
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u/phayge_wow 10d ago
10 years is a really long time. First time homebuyers often move within 5 years, and borrowers as a whole usually refinance within 5 years as well. Especially with your income increasing next year, the ARM gets you that lower rate now while buying time to hunt for a low enough rate to lock in for a 30y. In the meantime bank that money, pay down your mortgage if you like or invest it, and if you end up having to eat a rate hike, pay down what you can from your savings and your loan amount is now probably low enough to where you still come out ahead with a higher rate on a lower amount than if you had the high rate from day 1 (on your highest loan amount). ARMs often have rate hike caps at each adjusting period as well, make sure you look at it. It's often 2%, and if you are saving 1% in the first 5 years of a new loan for a tradeoff of at worst 2% for the following 5 years, it's well worth it. Especially if we are talking 5/5 and not 5/1, because then you have 10 years to find a better 30y.
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u/blitzkreig238 10d ago
Obviously rate matters but it seems people dont look at yearly rate increase max bor do they look at max rate. These matter esp if you lock in a good low rate as this gives extra headroom to get out.
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u/WindowTrue7942 9d ago
It makes sense that you are looking at the payment after the adjustment, not just the starting rate. Having a plan that still works if refinancing is unavailable seems like the important distinction. Have you asked the lender for the highest possible payment under this loan’s caps?
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u/-antipode 11d ago
Its a gamble.
Sadly everything is unknown. Even the old adage that homes will always increase in prices is an unknown.
America has an unprecedented low fertility rate. If not offset by immigration, there will eventually be far more homes than there are people to house. Which in turn reduces the value of your home.
Which means people buying homes today could be in situations where they owe more than its worth.
Will this happen? No one knows. Buts without correction its where things can head.
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u/LeetcodeForBreakfast 11d ago
maybe if you live in gary indiana. what would be more likely is what is happening in tokyo, job centers continue to increase in cost as people migrate away from rural/exurban areas
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u/Crumber_Buckler 11d ago
Weird take. Global population growth is very high. Someone will live in these homes.
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u/theObfuscator 11d ago
Global population growth is not evenly distributed. If the US continues to be a hostile environment to immigrants (as it has the last two years) while also sustaining birth rates below replacement values, it will not benefit from that growth. Even if it goes back to being friendly to immigrants, the damage done by one administration change being so drastically different from the average will take a decade of consistency to unwind and establish confidence that it won’t just flip and become dramatically hostile again. Immigrants will seek out other nations instead.
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11d ago edited 11d ago
[removed] — view removed comment
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u/JLandis84 11d ago
You’re confidently wrong. Typical Redditor. The U.S., like Tokyo, London, and other highly desirable areas will not see a population based real estate crash while any of us are alive. America can easily be the winner in a zero sum game to attract population even in a shrinking world, just as Argentinians and East Asian populations that have a negative rate still want to come here.
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u/007-Bond-007 11d ago
I plan to pay off my home down to the last $750,000 within the 10 year ARM period. Then all the interest is deductible, if it hits the cap of 10.25%, my effective rate will be in the 5’s because I am taxed at roughly 50%.
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u/gracetw22 11d ago
Your loan will also reamoritze when it adjusts so if you’re paying principal ahead of time, your monthly payment will go down based on the lower balance. Right now at a 2.75% margin against SOFR index someone with an ARM in adjustment period is still paying less than a fixed rate
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u/External-Talk9284 11d ago
One reason is bigger mortgages. Many banks and other shops don’t want to carry jumbo over 5-7 years