The moment we started the house hunting in late 2012, we also started the mortgage hunting. Compared with getting the dream house at the right price, getting the right mortgage is at least equally important, if not more, to secure a solid financial foundation of home ownership.
Deciding the most suitable type of mortgage is the first step in this process. Usually, the choice is between fixed rate mortgage (FRM) and adjustable rate mortgage (ARM). There are some other niches like balloon loans or interest-only loans as well.
We used different types of mortgages in our brief homeownership between 2003 and 2005. We bought the house with a 7-year balloon mortgage at the rate of 4.25%, which we later refinanced to a 5/1 ARM with at the rate of 3.50%. (The refinancing experience was documented in this blog here, here, here and here.)
Fortunately, this time we knew from the beginning that the adjustable rate mortgage is more appropriate for us based on family situation. We reached this conclusion based on two factors:
First, we continued to make progress in accumulating wealth and were well on track of amassing $3M by 2020. We will have much more financial muscle to explore different things by then.
Second, our son, then at 11, was 7 years from heading to his college days. We knew the clock is ticking and already started to prepare for the unavoidable of being empty nesters in 2020.
Given such, my wife and I had been discussing about leading an active early retirement life including experiencing different parts of the world, exploring new hobbies and such. We knew that for the house we were looking for, we wouldn't live in it much longer beyond the 2020 Summer Olympics.
The adjustable rate mortgage (ARM) thus became an obvious choice.
Next: my experience of getting an ultra-low mortgage rate.