Adjustable rate: when it makes sense, and when it does not

How today’s ARM is built

A fixed period, then adjustments on a schedule, with caps at every stage. The caps are what changed after 2008.

A 7/6 ARM is fixed for seven years, then adjusts every six months. The adjustment is an index plus a margin — the margin is fixed for the life of the loan and is the number to compare between lenders. Three caps constrain it:

• Initial cap — the most it can move at the first adjustment.
• Periodic cap — the most at each subsequent one.
• Lifetime cap — the ceiling, full stop.

The question that decides it

How likely is it that you still hold this loan when the fixed period ends?

Not “will I still own the house” — will I still have this loan. Two things end it: selling, and refinancing. If your realistic answer is that you will have moved or refinanced within the fixed period, the ARM’s lower start rate is close to free money. If you might still be holding it in year eight, you are taking rate risk.

Three situations where the answer is usually clear:

• A known move. A three-to-five-year posting, a plan to trade up, a property you intend to sell.
• A bridge to a refinance, if you have a specific reason to expect to refinance — though “rates will fall” is a forecast, not a reason.
• An investment property you intend to flip or reposition, where the horizon is the business plan.

Why Florida changes the calculation slightly

Because the mortgage is a smaller share of your payment here, so a rate saving moves the total less than you would expect.

On a $400,000 home in Miami-Dade with 20% down, principal and interest is around $2,076 a month, and property tax and insurance add roughly $1,300 more before any association fee. A half-point saving on the loan is about $100 a month against a total near $3,600 — real, but under 3% of the payment.

Meanwhile the two lines that are not fixed by your loan — tax and insurance — will rise over those seven years whatever your rate does. An ARM does not add volatility to a stable payment; it adds volatility to a payment that already has some.