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Is a 15/15 ARM Money Saver Loan for You?
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Taking out a mortgage is a big decision with a number of factors to consider.
You need a monthly payment that leaves enough room in your budget for your other expenses and your savings goals. And you want to minimize the long-term cost so that you’re not unnecessarily spending money on interest that could be going toward other priorities.
A 15/15 adjustable rate mortgage (formerly known as a “money saver loan”) is a unique type of loan that could help you accomplish both of those goals. This article will explain how they work and when they might make sense.
The basics of ARMs
Before diving into the details of the 15/15 adjustable rate mortgage — ARM for short — it’s important to understand how ARMs work in general.
ARMs typically have a fixed interest rate for a certain number of years, after which the interest rate will start to adjust on a set schedule. For example, a 5/1 ARM has a fixed interest rate for five years before it starts adjusting every year for the life of the loan.
However, ARM interest rates can’t rise infinitely. There are typically three types of caps that limit both the incremental and the overall increase:
- Initial adjustment cap – Limits the increase during the first adjustment.
- Subsequent adjustment cap – Limits the increase during all subsequent adjustments.
- Lifetime adjustment cap – Limits the total increase across all adjustments over the life of the loan.
For example, let’s say that your initial interest rate is 3.5%, you have an initial adjustment cap of 1%, a subsequent adjustment cap of 2% and a lifetime adjustment cap of 5%.
If at the time of the first adjustment, your lender calculates the new interest rate as 5%, it will actually only increase to 4.5% because of the 1% initial adjustment cap. All subsequent adjustments will max out at a 2% increase, and your interest rate will never rise higher than 8.5%.
These caps serve to protect you from the risk of ever-increasing interest rates.
What is the 15/15 ARM?
A 15/15 ARM is a specific type of adjustable-rate mortgage where the interest rate is fixed for 15 years, it adjusts once and then it remains at that new interest rate for the remaining life of the loan.
In other words, it’s a 30-year mortgage with one interest rate for the first 15 years and another interest rate for the next 15 years.
One of the benefits of a 15/15 ARM is that it typically starts off with a lower interest rate than you would get from a 30-year fixed mortgage. For example, the NIH Federal Credit Union currently offers the 15/15 ARM with an initial interest rate of 4.250%, while its 30-year fixed rate mortgage is offered at 4.625%.
Assuming a $300,000 mortgage, the monthly payment on the 15/15 ARM would be $1,475.82, which is $66.60 less than the $1,542.42 monthly payment on the 30-year fixed rate mortgage. And over the course of 15 years, you would have only paid $161,827.50 in interest on the 15/15 ARM, which is $15,759.01 less than the $177,586.51 in interest you would have paid on the 30-year fixed rate mortgage.
The risk is that interest rates could rise over the next 15 years and that your new interest rate could be much higher after it adjusts.
NIH Federal Credit Union’s 15/15 ARM is capped so that it can only increase by up to six percentage points, which means that your interest rate could rise as high as 10.250%. With a $196,179.90 outstanding balance on that $300,000 loan after 15 years, a 10.250% interest rate would increase your monthly payment to $2,138.27, which is much higher than the payment on the fixed rate mortgage.
Of course, that’s a worst case scenario and there are a few reasons why it may not be as big a risk as you think.
First, research from the National Association of Realtors showed that the median length of time that people stay in their home is just 12 years. That is, you’re more likely than not to sell your home before you even get to the 15-year adjustment. That’s especially true for people ages 36 or younger, where the median time spent in a home is just 10 years.
Second, while interest rates have risen from the historic lows seen the past few years, there are some reasons to believe that the rise from this point forward will be relatively slow.
There’s a school of thought that interest rates are going to be lower for longer.
Tendayi Kapfidze, chief economist at LendingTree. “Interest rates are, to an extent, tied to the growth rate of the U.S. economy, and there are signs that growth may be slow.”
Third, there’s always the option to refinance after 15 years if you can get a better deal. Refinancing does come at a cost and there’s still no guarantee about what interest rate you could secure down the line, but you may at least have that option available to you.
The 15/15 ARM vs. 5/1 and 7/1 ARMs
5/1 and 7/1 ARMs are the most popular types of adjustable-rate mortgages. Each of those ARMs have shorter fixed-rate periods — five and seven years respectively — after which they adjust every year for the life of the loan.
One of the benefits of those other ARMs is that they typically have a lower interest rate to start. For example, NIH Federal Credit Union’s 5/1 ARM starts at 2.625% and its 7/1 ARM starts at 3.125%, compared with the initial 4.250% for its 15/15 ARM. That lower interest rate means lower monthly payments and lower total interest costs.
The trade-off is that the interest rate on the 15/15 ARM is fixed for significantly longer. A 5/1 ARM will start adjusting after just five years, which means that it may not be long before your interest rate is higher than the 15/15 ARM.
With interest rates increasing, and the expectation for them to continue rising over the next year, the 15/15 ARM offers the potential for big savings.
A 15/15 ARM also offers more budgeting stability, given that there’s only one adjustment. In contrast, both the 5/1 ARM and the 7/1 ARM adjust annually after the initial fixed-rate period, adding continuous uncertainty to your budget and your overall financial plan.
Much of the choice here depends on how long you plan to stay in the home. For shorter time periods, a 5/1 or 7/1 ARM may make more sense since you can take advantage of the lower interest rate. For longer time periods, a 15/15 ARM provides more certainty and could save you money.
Benefits of a 15/15 ARM
There are a few big benefits to a 15/15 ARM compared with other mortgages.
First, the initial interest rate is typically lower than what you’d get from a 30-year fixed mortgage, allowing you to save money over at least the first 15 years of the loan.
Second, the fixed-rate period is longer than most other ARMs, providing more stability and potentially saving you money if interest rates continue to rise.
Third, given that most people sell their homes within 12 years, odds are that you’ll never even reach the point where your 15/15 ARM adjusts.
From a lender’s perspective, the 15/15 ARM provides two main benefits.
First, most loans are sold shortly after the loan is made, and 15/15 ARMs usually sell for more than 30-year fixed rate mortgages.
Second, there aren’t many lenders that offer the 15/15 ARM, which means that any lender that does can cater to a specific consumer niche and potentially add to their overall business.
Downsides of a 15/15 ARM
Of course, a 15/15 ARM isn’t always the right move. Some of its core features can put it at a disadvantage compared with other mortgages.
First, it has a higher initial interest rate than other ARMs. That means a higher monthly payment and a higher total interest cost over the first few years of the loan.
Second, a 30-year fixed rate mortgage provides more long-term stability, and it’s even possible that you could get a lower initial interest rate. There are currently 30-year fixed mortgages available with interest rates as low as 4.000%, which is significantly lower than the 4.250% offered by NIH on its 15/15 ARM. You would have to shop around to figure out exactly what offers are available to you.
Third, that one-time adjustment after year 15 could come as a shock. If interest rates have risen significantly, your monthly payment could see an immediate and significant increase as well, which could be tough on your budget.
Fourth, it’s worth noting that ARMs can adjust both up and down, but with only a single adjustment, you may not be able to take advantage of any downward trends in interest rates.
In short, with a 15/15 ARM, there’s a lot riding on that one adjustment point and it’s impossible to know where interest rates will be and which other options you’ll have available to you at that point in time.
Is a 15/15 ARM a good idea?
So, when does it make sense to consider a 15/15 ARM?
It could be a good move for anyone who will likely move within the next 10 to 15 years, such as growing families or near-retirees. You’ll get a lower interest rate than a 30-year fixed mortgage and you’ll have more time to make a decision before the adjustment than you would with a 5/1 or 7/1 ARM.
Also, people who need a more budget-friendly payment now, but who have the potential for significant income growth over time, could take advantage of the benefits without facing as much risk if there’s a big adjustment after 15 years.
Lenders may want to make sure that the buyer has higher than average career advancement potential before recommending a 15/15 mortgage. If the homeowner ends up staying more than 15 years, much of the advantage could otherwise be lost.
A 15/15 ARM may also make sense if you plan on making extra payments toward your mortgage, since you’ll be able to pay down the loan principal and build equity faster than you would with a 30-year fixed rate mortgage.
Going back to our example, $300,000 mortgage and assuming that you can put $2,000 toward your mortgage each month, the 30-year fixed rate mortgage at 4.625% would have a $81,292.07 loan balance at the end of 15 years. With the 15/15 ARM at 4.250%, the loan balance after 15 years would be $64,558.64, putting you $16,733.43 ahead.
Should you take out a 15/15 ARM?
A 15/15 ARM offers a unique opportunity to secure a lower interest rate than a 30-year fixed rate mortgage for a longer period of time than most other adjustable-rate mortgages. In the right situations, that could save you money and make it easier to work toward other financial goals.
But it all depends on the specifics of your situation. If you plan on selling your home within the next few years, a 5/1 or 7/1 ARM may make more sense. And if you plan on staying in your home forever, securing a low fixed rate for the entire life of the mortgage might be a better deal.