Background:

My wife and I just went under contract on a new construction. This is our second home. We aren’t sure how long we’ll will stay in this home. We’re fairly confident it’s not our “forever home”. We have two kids, and I have what I would consider to be a steady job. The builder (D.R. Horton) is offering two choices for financing through its financing company, DHI Mortgage. They are both 30-year loans. The first is a 4.99% fixed, while the second is a 3.875% 7/6 adjustable rate mortgage (ARM). The difference in payment size between the two favors the ARM by about $300 per month. I’ll provide further details on the ARM because the details matter. All details are pulled from a disclosure document that I have yet to sign. I will share my personal thoughts at the end of the post.

The ARM is fixed at 3.875% for the first 7 years, after which the rate becomes adjustable. The most the rate can climb is 5% over where it starts, meaning it will never be higher than 8.875%. The moment year 7 ends and year 8 starts, the rate will be adjusted to SOFR + 3%. After the initial adjustment, the rate can only change 1% every 6 months.

I confirmed with the loan officer that there are no early payment penalties for both financing options, which means I can make as many extra principal payments as I would like.

Question:

Which financing option would you take if you were in my shoes?

My personal thoughts:

I am torn on this decision because taking 4.99% fixed is one heck of a deal with virtually zero risk. My creative side thinks it could be great to take the ARM’s lower payment and plough back the savings over the first 7 years directly into the loan, thus hedging against the risk that interest rates could rise after year 7. By year 8, I would have roughly $25,000 more in equity over the fixed rate in this scenario. The ARM savings would also allow me to be more flexible. I could use those funds to finish the basement, which would further infuse more equity in the home, thus allowing me to reach 20% equity more quickly to kill PMI.

Edited: Added builder and lender name and some other background info since a few people wanted to know.