What's the best mortgage rate for a first-time buyer?

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In this episode, Adam Nash gives his take on the best mortgage rate for all first-time home buyers a 30-year fixed, a 10-year ARM, or a 7-year ARM. Since 2017, Adam Nash has taught “Personal Finance for Engineers” at Stanford. He's covered topics from compensation, investing, to real estate. He’s the Former President and CEO of Wealthfront, Former Vice President of Product & Growth of Dropbox, and on the Board of Directors at Acorns. He’s currently the CEO and co-founder of Daffy, a not-for-profit community built around a new, modern platform for giving.

All right, Adam, for a first-time home buyer in this market, what would you recommend? The debate is a 30-year fixed, a 10-year arm, or a 7-year arm? Oh, this is a hard problem and one that actually every first-time home buyer faces, which is what to do about the length of their interest rate protection on their mortgage, right? A 30-year fixed mortgage has a fixed rate for the entire loan, which means that you can plan that if you stay in your home for 30 years, you will make the same payment every month.

Arms or adjustable rate mortgages have interest rates that start to vary after a certain number of years, right? So a 5-1 arm will keep its interest rate for 5 years, but then can change every year after that. A 7-1 is 7 years, 10-1, etc. There's a lot of variations in the mortgage market. The hard part about this is that 30-year mortgages, the longer you protect your interest rate, the higher that interest rate is. So it's not a free choice. If you decide to get a 30-year fixed mortgage, you are choosing a more expensive mortgage in exchange for the certainty that your interest rate will never change. The problem with this is that actually most home buyers don't stay in their home for 30 years. And in fact, I think the last data I saw said that the average US home buyer only stays in their home for about 7 to 9 years. So getting a 30-year mortgage is actually very expensive insurance. So it really has more to do with your own personal sense of risk and what you think you're going to do with the home over the long term. If this is a home you think you might be in for 10, 20, or even 30 years, absolutely a 30-year fixed mortgage guarantees that you won't have your payments vary and worse that you might not be able to afford your home in the future if things change. However, if this is your first home and you think you're only going to be in it for a smaller number of years or you're very confident in your income potential, you might choose to get an adjustable rate mortgage. Now the reason this is such a hot topic right now is inflation is back for the first time in decades and interest rates are going up in a way that's scaring a lot of first-time home buyers. And so there's a little bit more fear now that you might have higher interest rates in the future that you can't afford. And that's probably pushing more people towards a 30-year fixed mortgage. At the same time, because rates are going up, houses that used to be affordable on a given income now might look unaffordable at higher interest rates, pushing people towards the lower end of the market in terms of interest rate protection. And so they're looking at 5-1 adjustable rate mortgages more than they used to.

In the end, there's no one answer for everyone. There's risk in everything.

For most first-time home buyers though, they're buying a house that they don't plan to be in for a long period of time. So at minimum, I would say don't feel guilty for looking at all the options.

You're not doing something imprudent and try to make the choice that's best for you, giving your visibility into your future income and your confidence that you're going to be in that house for a long period of time.

Please note that the information contained on this page is for educational purposes only and should not be considered tax advice. Any calculations are intended to be illustrative and do not reflect all of the potential complexities of individual tax returns. To assess your specific tax situation, please consult with a tax professional.

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