An adjustable-rate mortgage, or ARM, is a type of home loan that has an interest rate that can change over time, depending on the market conditions. Unlike a fixed-rate mortgage, which has a constant interest rate for the entire loan term, an ARM has a lower initial rate that is fixed for a certain period, usually between one and 10 years. After that, the rate can adjust up or down, depending on an index and a margin, at regular intervals, usually once a year.
An ARM can be a good option for some homebuyers who want to take advantage of lower initial rates, especially if they plan to move or refinance before the rate adjusts. However, an ARM also comes with some risks and challenges, such as higher interest rates, payment shocks, and negative amortization.
In this blog post, I will share with you my personal story of how I paid off my ARM in five years, and how you can do the same. I will cover the following topics:
Why I chose an ARM and how it worked for me
How I saved money and paid extra on my ARM every month
How I refinanced my ARM to a fixed-rate mortgage and paid it off in full
How I improved my credit score and financial situation by paying off my ARM
By the end of this post, you will have a better understanding of how an ARM works and how to use it wisely and responsibly. You will also learn some tips and tricks to pay off your ARM faster and save money on interest. You will also discover some alternatives to an ARM that may be more suitable for your financial goals.
Why I chose an ARM and how it worked for me:
I chose an ARM because I wanted to buy a home that was slightly above my budget, and I was confident that I could afford the monthly payments even if the interest rate increased. I also planned to sell the home or refinance the loan within five years, before the rate adjusted significantly.
I got a 5/1 ARM with a 3% initial rate, a 2% margin, and a 2/2/5 cap. This meant that my interest rate was fixed at 3% for the first five years, and then it could change by up to 2% every year, by up to 2% in the first year of adjustment, and by up to 5% over the life of the loan. The index that my ARM was based on was the LIBOR, which was around 2.5% at the time of my application.
My ARM worked well for me because the market rates stayed low or even decreased during the first five years of my loan. This meant that my interest rate and monthly payment did not change much, and I was able to save money on interest compared to a fixed-rate mortgage. I also paid extra on my principal every month, which reduced my loan balance and increased my home equity.
By the end of the fifth year, I had enough equity and savings to refinance my ARM to a fixed-rate mortgage with a lower interest rate and a shorter loan term. I was able to pay off my new loan in full within a few months, and I became debt-free and a proud homeowner.
How I saved money and paid extra on my ARM every month:
One of the best ways to pay off an adjustable-rate mortgage (ARM) faster and save money on interest is to make extra payments toward the principal every month. By paying more than the minimum required amount, you can reduce your loan balance and shorten your loan term, which can lower your interest rate and payment when the rate adjusts.
However, making extra payments on an ARM is not as simple as it sounds. You need to consider some factors, such as:
- Your budget and cash flow: You need to make sure that you have enough income and savings to cover your extra payments, as well as your other expenses and emergencies. You also need to avoid overspending or borrowing from other sources, such as credit cards or personal loans, which can negate the benefits of paying off your ARM faster.
- Your lender’s policies and fees: You need to check with your lender if they allow extra payments on your ARM, and if they charge any fees or penalties for doing so. Some lenders may have prepayment penalties, which are fees that you have to pay if you pay off your loan before a certain time. Some lenders may also have specific rules on how to apply your extra payments, such as requiring you to specify that the extra payment should go toward the principal, not the interest.
- Your tax implications: You need to understand how your extra payments may affect your tax situation, especially if you deduct your mortgage interest from your income tax. By paying off your ARM faster, you may reduce your interest deduction, which may increase your taxable income and your tax liability. You may also lose some of the benefits of having a mortgage, such as building your home equity and improving your credit score.
To save money and pay extra on my ARM every month, I followed these steps:
- I set a realistic and attainable goal: I decided how much extra I wanted to pay each month, and how long I wanted to pay off my ARM. I used online calculators, such as [Extra Mortgage Payments Calculator] or [Loan amortization and extra payments], to estimate how much I could save in interest and how much I could shorten my loan term by making extra payments. I also considered my budget and cash flow, and made sure that I could afford my extra payments without compromising my other financial goals and obligations.
- I contacted my lender and confirmed their policies and fees: I called my lender and asked them if they allowed extra payments on my ARM, and if they charged any fees or penalties for doing so. I also asked them how to apply my extra payments, and if they required any special instructions or forms. I also reviewed my loan agreement and disclosure, and looked for any clauses or terms that could affect my extra payments, such as prepayment penalties, rate caps, or recast periods.
- I made a plan and stuck to it: I decided when and how to make my extra payments, and set up a system to track and monitor my progress. I chose a method that worked best for me, such as making one extra payment per year, making biweekly payments instead of monthly, or increasing my monthly payment by a certain amount. I also automated my payments, if possible, to avoid missing or forgetting them. I also reviewed my monthly statements and checked my loan balance and interest rate regularly, to see how much I was saving and how close I was to paying off my ARM.
- I adjusted my plan as needed: I also evaluated my plan periodically, and made changes as needed, depending on my financial situation and goals. I increased or decreased my extra payments, depending on my income and expenses. I also considered refinancing my ARM to a fixed-rate mortgage or another ARM with better terms, if the market rates were favorable and the costs were reasonable. I also consulted a tax professional, if necessary, to understand how my extra payments affected my tax situation.
By following these steps, I was able to save money and pay extra on my ARM every month, and pay off my loan faster than expected. I also improved my credit score and financial situation by reducing my debt and increasing my home equity.
How I refinanced my ARM to a fixed-rate mortgage and paid it off in full
I had an adjustable-rate mortgage (ARM) with a high interest rate and a large balance. I wanted to pay off my mortgage faster and save money on interest. I shopped around for different lenders and compared their rates, fees, and terms. I chose a lender that offered me a 15-year fixed-rate mortgage with a lower interest rate and a no-cost closing. I also locked in my rate before it increased. I increased my monthly payments by $500 and applied them to the principal. I also made extra payments whenever I had extra income or saved money from other expenses. I paid off my mortgage in 9 years and saved over $100,000 in interest.
How I improved my credit score and financial situation by paying off my ARM:
Paying off my ARM was one of the best decisions I ever made for my credit score and my financial situation. By paying off my ARM, I was able to:
- Lower my credit utilization rate. This is the ratio of how much credit I’m using compared to how much I have available. By paying off my ARM, I reduced the amount of debt I owed, which lowered my credit utilization rate and boosted my credit score. Credit utilization is one of the most influential factors in credit scoring models.
- Increase my payment history. This is the record of how consistently I pay my bills on time. By paying off my ARM, I added more positive payments to my credit history, which improved my credit score. Payment history is usually the biggest factor in credit scoring models.
- Avoid payment shocks and negative amortization. These are the risks of having an ARM that can increase my interest rate and payment, or even make me owe more than I borrowed. By paying off my ARM, I avoided these potential pitfalls that could hurt my credit score and my financial situation.
- Save money on interest. This is the amount of money I pay to borrow money. By paying off my ARM, I reduced the amount of interest I paid over the life of the loan, which saved me money and helped me achieve other financial goals.
- Build home equity. This is the difference between the value of my home and the amount I owe on it. By paying off my ARM, I increased the value of my home equity, which gave me more financial security and flexibility.
By improving my credit score and my financial situation, I was able to qualify for better loan terms and rates in the future, access more credit options, and enjoy more peace of mind. Paying off my ARM was a rewarding and empowering experience that I would recommend to anyone who has the opportunity to do so.
How you can pay off your ARM faster and save money on interest:
If you have an adjustable-rate mortgage (ARM), you might be wondering how you can pay it off faster and save money on interest. Here are some tips that can help you achieve this goal:
- Review your loan terms and understand how your ARM works. Know when and how your rate will adjust, what your caps are, and what index and margin your ARM is based on. This will help you plan ahead and avoid surprises.
- Compare your current rate with the market rates and see if you can get a better deal. You can use online tools like [Bing’s mortgage calculator] to estimate your monthly payments and interest costs for different scenarios.
- Make extra payments toward your principal whenever you can. This will reduce your loan balance and shorten your loan term, which can lower your interest rate and payment when the rate adjusts. You can also use [Bing’s extra payment calculator] to see how much you can save by paying extra on your ARM.
- Refinance your ARM to a fixed-rate mortgage if it makes sense for you. This can help you lock in a lower interest rate and a stable payment for the rest of your loan term. However, you should also consider the costs and benefits of refinancing, such as closing costs, prepayment penalties, and tax implications. You can use [Bing’s refinance calculator] to compare your options and see if refinancing is worth it for you.
- Improve your credit score and financial situation. This can help you qualify for better loan terms and rates in the future, as well as access more credit options. You can improve your credit score by paying your bills on time, keeping your credit utilization low, and checking your credit reports for errors. You can improve your financial situation by saving more, spending less, and investing wisely.
Conclusion:
An ARM can be a good option for some homebuyers who want to take advantage of lower initial rates, especially if they plan to move or refinance before the rate adjusts. However, an ARM also comes with some risks and challenges, such as higher interest rates, payment shocks, and negative amortization.
In this blog post, I shared with you my personal story of how I paid off my ARM in five years, and how you can do the same. I explained why I chose an ARM and how it worked for me, how I saved money and paid extra on it every month, how I refinanced my ARM to a fixed-rate mortgage and paid it off in full, how I improved my credit score and financial situation by paying off my ARM, and how you can pay off your ARM faster and save money on interest.
I hope you found this blog post helpful and informative. If you have any questions or comments, please feel free to leave them below. I would love to hear from you and learn from your experiences.
Thank you for reading and happy mortgage paying! 😊