title. i understand the difference between variable and fixed as definitions however with loans, ‘variable’ doesn’t quite register to me..
why on earth would someone consider that type of loan with a purchase of let’s say, a house?
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I’m in the US, for reference. The most common mortgage here is a fixed mortgage. You can get a 30-year loan for a house today for around an 8% interest rate. That rate never changes for your mortgage.
With an adjustable rate mortgage (ARM), the interest rate is fixed a few years then starts adjusting towards the current market rate. If you get a 5/1 loan at 4% interest, you are guaranteed to pay 4% for the first 5 years. After that, the rate changes. It could go up or down depending on where rates are now. An ARM has caps on how much it can change each year and how much it can change over the life of the loan. For many ARMs, that 4% initial rate could rise as high as 9% eventually (the lifetime cap depends on the full terms of the loan).
I’ll share my history on mortgages.I bought my first house in 2000 at a 30-year fixed rate of around 8%. I refinanced a year later because the rate had dropped to around 6.5% for a 30-year fixed loan. My mortgage dropped by roughly $130 a month, which was well worth the cost of refinancing even though it had only been one year. The breakeven point was somewhere around one year, and I knew I’d be in that house for a lot longer than that, so it made sense. In the end, I saved 10k by the time I sold that house.
For my second house, I was moving to another state, and knew I would be there for at least three years but possibly much longer. I went with an adjustable rate mortgage because (at under 4%) it saved me $250 a month compared to the current fixed rate (5.5%). I ended up moving after 3 years. Even if I had stayed, the amount I had saved could easily pay for refinancing a new mortgage. Having an adjustable rate mortgage (ARM) worked out great for me – I saved about $9k in the three years I owned that house.
Bought my current house in 2017. Got a 30-year fixed mortgage. I refinanced it 2021, when rates were super low. I switched to a 15-year fixed mortgage with a interest rate of 2.25%. For comparison, the 15-year fixed rate today is just over 7%.If I had gotten a 5/1 ARM in 2017 when I refinanced it would have been around 4% interest. That would have started adjusting after 5 years, in 2022, and my rate today would be around 7%. My payment would have gone up by $550 a month. An ARM would have been an awful move for me in 2017.
ARMs only make sense if
* You’re planning to sell the house soon after the initial period (five years for a 5/1 ARM)
* You’re planning to refinance during the initial period
* You are willing to gamble that mortgage rates will stay mostly flat or drop
With an ARM, you’re taking a risk that rates may rise. If they rise enough, you could end up paying a lot more each month for your house.
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