About once a month, I receive emails or comments from readers criticizing adjustable mortgages (ARMs) as bad financial choices. I have been a champion of weapons since I started Financial Samurai in 2009 and I understand this challenge.
However, I still prefer a fixed-rate mortgage that is over 30 years old, because I don’t want to pay more interest than necessary. Yes, there will be higher interest rates, like we are experiencing now. Yes, your arms may sometimes reset during high inflation. But, in the long run, I believe the broader interest rate trend is to be kept low, driven by technology, efficiency and globalization.
Here is an example of an arm overturn:
Hey Sam,
I know you have been a supporter of weapons for years. I got your logic, but for my investment properties and main residences I refinanced in 2020 and 2021. All my prices are fixed between 2.6% and 3.5%. I think long-term fixed 15- and 30-year mortgages work better.
I know there are several people who have weapons and sell their investment properties, or are still dealing with negative monthly cash flows. You may still believe in weapons yourself, but maybe it’s time to revisit the topic based on today’s environment. Maybe I missed their merits.
Criticism of weapons has intensified as mortgage rates soared in 2022 after years of active fiscal stimulus. Suddenly, locking in a fixed mortgage for 30 years with a market bottom of 2.5% – 2.75%, it looks like a stroke of genius.
But that’s the truth: if strategically used, the arm and a 30-year fixed mortgage can be a wise move. The right choice depends on your financial situation, risk tolerance and home ownership goals.
Let me share a case study on how the arm saves me money and even helps me make more money.
I will also explain why weapons are ideal for low-risk homebuyers for personal finance enthusiasts. While a 30-year fixed mortgage may be more suitable for high-risk buyers, this usually describes a typical American homeowner.
cASE Research on how to save with your arms and make money at home
A month after Covid Lockdowns, in April 2020, I stumbled upon a stunning home with panoramic sea views. This is a little problem since I just bought the house in April 2019.
My initial plan was to remodel my 2019 repairer into gut and expand it to about 2,840 square feet. Unfortunately, after a year of remodeling, I realized that it will be done by the end of 2020 due to Covid delays. So I decided to look for another home.
The new home I discovered in 2020 has been completely remodeled and has an area of over 2800 square feet. As a father and junior income income, my first responsibility is to serve my family. Our daughter was just born in December 2019 and I don’t want her to have to live through architecture.
Finally, I decided to get 7/1 arm at a rate of 2.15%. I could have gotten a 30-year fixed-rate mortgage at 2.5%, but I wanted to save money. Also, getting one arm allowed me to borrow more money to buy a house because of the lower payment.
More importantly, deep down, I knew that this new home was not my eternal home. This is the same as my 2019 home ended up ending with it. Its view is slightly better.
I foreseeed my family and I lived at home for 10 years before moving to Honolulu.
Selling the house in five years to make a profit
My prediction of owning a home that lasted 10 years didn’t work. Instead, greed took over because I found a better home in 2022. Fortunately, I couldn’t afford it at the time. But once the house returns to the market at a lower price in 2023, I can. My stock rebounded and I saved more money.
After buying another home in 2023 and renting my 2020 home, I finally sold my home in 2025, saving about $31,000 in mortgage interest expenses through my arms. I also got a bigger reward because I was able to borrow more with my arms. The return boost is an additional 10%.
Ideally, I would expect to own a home in 2020 for seven years until the 2.125% mortgage rate will be higher last month. However, even if the reset is higher, the eighth year reset will only increase by 2% to 4.125%. How many hats can be adjusted by the arm.
So the lesson from my arm case study is Know yourself. Based on my obsession with real estate, my desire to climb the property ladder and my net worth growth forecasts, I expect to have a new home when the 7/1 ARM entry rate is due. Sure enough, that’s true.
The formula that helped me decide my arms
As a personal finance enthusiast, you will continue to run financial models to predict the future. In my case, I calculated the price of buying a home in 2020 relative to my net worth. Then establish something that may reject in three, five and ten years.
Finally, I refer to the suggested primary residence as the percentage of the net worth chart to determine the home I can be responsible for buying. I then calculated when a home feels not enough in 2020 (less than 10% of its net worth).
I am a fan of optimizing my life arrangements, especially with my family. My wife and I don’t have to go anywhere to work, so we place great importance on having a good home. But if we have to go to the office for 12 hours a day, maybe not.
To help clarify my formula to determine the arm, let’s create an example.
My advice to those seeking financial freedom is Spend no more than 30% of your net worth on your home. Or, if you have purchased a home, increase your net worth until your home is less than 30% of your net worth.
Example formulas for using arms
Net worth: $3.5 million
Targeted housing price: $1 million
The target home equals 28.5% of your net worth, which is the ideal recommended percentage.
You predict that your net worth will grow by 10% per year over the next 10 years. As a result, your net worth grew to $4.66 million in three years, $5.36 million in five years, and $9.078 million in 10 years. By the way, it’s the feeling after reaching various millionaire milestones.
For simplicity, let’s say your home is worth $1.2 million (purchased from $1 million) in three years and stay there. Now your home is worth only 26%, 22% and 13.2% in net worth in just three, five and ten years.
Given that you don’t want to live so frugal in 10 years, you’re happy to take 10/1 at a mortgage rate of 0.375% lower than a fixed mortgage rate of 30 years of saving fixed mortgage rate. You know, if you don’t spend money, it makes no sense to make money. In 10 years, you will most likely want to buy a better house.
If you don’t buy a better home in 10 years, there’s less to work hard today. But you are an aggressive professional who wants to climb the company ladder, make more money, and live your best life.
So getting a 30-year fixed-rate mortgage at a higher rate (20 years longer than your possible holding period) is not ideal.
It’s OK to get a fixed interest rate of 30 years, don’t worry
Just because I’d rather get an arm doesn’t mean having a 30-year fixed-rate mortgage is not good. It’s not!
Feeling very good with a 30-year fixed-rate mortgage, especially if you refinance or take it out at the bottom of the interest rate cycle. Gifts that can borrow money so cheaply. Then, to be able to get higher risk-free interest rates in the money market or treasury, this is another blessing.
We all like to think that the financial choices we make, especially the large choices are the best choice. I’ll just ask you Don’t make a blanket statement, say your arms are bad. Buying a home at a lower interest rate is a great solution in your financial situation and living environment.
Saving money and matching fixed interest rate duration to your home ownership period is a best option. But pay higher mortgage rates for many to make it more secure.
The spread of interest rates is too high and it is worth it to me in 2020. If I could have received a 30-year fixed-rate mortgage with just 0.125% – an increase of 0.25%, then I might have accepted it.
Dangerous home buyers for 30 years
If you spend a lot of money on your primary residence by spending more than 30% of your net worth on your primary residence, getting a 30-year fixed interest rate will provide more peace of mind.
I think the typical American has 70%-80% of their net worth in their primary residence, which seems too much to me. So much net worth is why it was flooded by so many homeowners during the 2008 global financial crisis.
So, a typical American who gets a fixed interest rate mortgage of 30 years is a way to protect his attention. It also protects the rest of us who are unwilling to take risks. We do not want our home value to be hammered due to foreclosure.
Arms are suitable for home buyers with less risk
If you don’t bet on the farm and buy a primary residence equal to 30% of your net worth or less, it might be more appropriate to take more “risk” by getting your arms. You have misunderstood the numbers and are happy with various financial situations in the future. Even if your arm is reset to maximum interest rate, you’ll still be fine because you have more net worth to cover it.
Hope you enjoyed this case study, how using your arms can save you money, help you build wealth and align with your home purchase goals. I’m sure some people would disagree, and that’s fine. The most important thing is to run the numbers and choose the mortgage that best suits your unique situation.
Reader, why do you think so many people are against weapons? Is this just a fear of the unknown or lack of first-hand experience? Does it make more sense to lock in lower rates over a fixed period to better align with your actual real estate holding schedule?
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Join over 60,000 readers and register mine Free weekly newsletter. Everything I write is based on first-hand experience. Financial Samurai was founded in 2009 one Leading independent personal finance website today. I am the author of “New America Today’s Bestseller”, Millionaire Milestone: Simple Steps to Seven Numbers.
