Choosing between an ARM or buying points

I am not a mortgage broker or banker but my gut tells me an ARM is probably not right for a forever home. I prefer ARM for a home I plan to sell in medium term window. I’d lock in now and refi if rates decide to do an about face.

An ARM is an accurate representation of the current rate.
A fixed rate is that rate + an insurance policy against a rapidly rising rate. You generally won’t find a fixed rate lower than an ARM rate. If you find a fixed rate low enough that you want the stability for a premium, go for it. But with a fixed rate, you pay a premium for the lender to take the risk (of locking up money at a low rate when they could be lending it for a higher rate), but it saves you from risk (a higher rate in 3, 5, 7, etc years)
It would be fairly rare for any typical mortgage to have early/overpayment penalties.
The rate increasing makes people uneasy, often.
An ARM will lose in an environment where the rate rises early in the term and rapidly.


We cannot tell the future, thus many people prefer a fixed rate. But if you can afford the max possible rate given in your ARM (they have an Initial term of no adjustment, then an adjustment period that’s specified (usually a year), then there’s an initial adjustment maximum, an annual adjustment maximum, and a lifetime adjustment maximum). you will usually pay less over the life of the loan by taking the ARM.
There are very few cases where if you paid the amount that the fixed rate would be on an ARM that you would not come out ahead on the ARM (so, if you took the risk of the ARM but made overpayments in the amount of the payment that it would’ve cost you if it were fixed). There are a lot of ways to make overpayments on a loan, and the earlier you overpay the more drastic the downstream effects are and the less a rate increase costs you in the future. I love using an amortization calculator to look at the difference certain amounts make over the life of a loan. If you use an ARM when you can’t afford the fixed rate or the highest possible adjusted rate, then you’re in too deep. If you don’t mind the risk after running the numbers, take the ARM. If you want to know what your payment in year 27 is today, take the fixed. And if you’re considering a $30,000 spend to buy the points to get your interest rate lower, make sure you run the numbers to see what the difference is between “points” bought and a $30,000 larger down payment. Your lender isn’t your friend and won’t run the numbers for you.

We are currently in an environment where we expect rates to rise, and I think most expect them to rise relatively rapidly, however unfortunately.


I am in an ARM currently. I am locked at ~2.6% for another 4 years before it adjusts (7/1), so I have a bit more time to watch what happens, but if rates are rising, then a much more significant amount of income will shift towards the mortgage. If this is a blip and they fall in that time, then I’ll keep putting money elsewhere. If that strategy isn’t interesting or doable, then an ARM isn’t for you.


There is no right answer. There are multiple variables that are unknowable which make the decision more difficult. But now is a time where I may shy away from an ARM, particularly if I weren’t keen on paying down early. But I also haven’t looked at the rates and terms lately.