ARM vs fixed mortgage

[amdskip]

My situation won't fit the normal online calculators so I come here to borrow the brains of my fellow ATers.

Loan Amount: 265k

We will be tossing around 120k at the mortgage within the next 4 months.

Loan Options:
30 years fixed - 3.99
20 years fixed - 3.75
7/1 arm with 30 year amortization-3.0 5/2/5 caps which means a ceiling of 8% based on the labor with a margin of 2.5%.

We plan on staying here long term. Paying the house off in 7 years would be pretty tight but 10 years is more realistic. Thoughts?

 

[jaedaliu]

My vote is the 7/1 (or even look into a 5/1 to get an ever lower rate) You'll have to do some guessing in your calculations, but if you're paying off that much quickly, you're somewhat protected from the fluctuations of the interest at the tail end.

 

[waggy]

You are staying long term? 20 (or even look into a 15 yr) fixed is what i would do.

 

[amdskip]

We won't qualify for a 15 year fixed unless my current house was sold.

 

[Blackjack200]

Does the 7/1 ARM have a rate ceiling? I think most of them do now.

 

[Druidx]

Can't compare the ARM unless we know what the max is. Those are normally better for short term. You don't want to think you'll have the option to switch to a fixed later on, the fixed rates will not stay this low forever.

 

[Vdubchaos]

I would never recommend getting ARM.....EVER

Fixed ONLY

 

[tracerbullet]

I had an ARM for a while, it didn't hurt in the least. But I was probably lucky that rates stayed low. It's kind of a balance between what you think the rates might do and what kind of worst-case scenarios there are (how much the rate can change maximum per year and how much overall). I moved to a fixed rate just in case.

I ended up going 30, fixed, so that the payments could be low "if needed" (i.e. became unemployed for a while). If I could pay it off faster, I would, and it wouldn't be quite a wash but it would be comparable. I've been doing that, the extra payment per year thing, so far. It feels like it's safer to me to work it this way.

Just some thoughts of course.

 

[Elbryn]

just to make sure i got the scenario right:
you have a 265k mortgage that you need to line up now, but will be prepaying 120k in 4 months from an existing house sale or whatnot. you're asking about which mortgage fits you best?

three responses:

1) in your case i'd try to find an arm versus fixed or plan to refi with a paydown when you sell your existing house and get the 120k back. otherwise you're locking into a roughly 2x higher payment versus an arm which will bring the payment down given the big prepay.


2) check out the penfed 5/5 arm
https://www.penfed.org/55-Adjustable-Rate-Mortgage/?intcid=ad-55ARM-PenFedORG-Ticker-04152013

5 year increments for rate resets. starts at 2.5% and caps at 2% max per 5 year period. plus they paying for much of closing costs right now.

2) arm online calcs are crap, try this arm spreadsheet
http://www.vertex42.com/ExcelTemplates/arm-calculator.html

you can fill in your assumed rates and enter in prepayment values to figure out the payment changes.

 

[Apathetic]

As others have said, before you choose an ARM you want to check out some numbers:
1) What is the rate period (6 months, 1 year, etc)
2) What is the maximum rate change per period
3) What is the maximum rate change per the life of the loan

Dave

 

[Naeeldar]

I would never recommend getting ARM.....EVER

Fixed ONLY

Good generalization. ARM loans are fine if you are in the right scenario in fact they can be ideal.

BUt good for you on your advice.

 

[Apathetic]

I would never recommend getting ARM.....EVER

Fixed ONLY

I generally agree. The only time I recommend people take a close look at ARMs is for people in the military because they tend to move at fixed periods of time. So if you know you're only going to be at your house for 4 years, a 5 year or 7 year ARM may make sense.

Dave

 

[amdskip]

5/2/5 caps which means a ceiling of 8% based on the libor with a margin of 2.5%.
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[Attic]

I wouldn't be in a hurry to pay off a house with expensive dollars relative to cheap dollars. Unless you have tons of capital, then do whatever makes you feel the best. But if you are managing a mortgage with purpose, then get it as cheap as you can on a fixed rate. We all know dollars today are much more expensive than dollars in 20 years, so why pay off in todays dollars any more than you have to?

30 year fixed FTW.

Adjustable rate is Russian roulette.

 

[Texashiker]

Why are people even considering an ARM?

Have we forgot what the banks did during the recent housing crash?

 

[Vdubchaos]

Why are people even considering an ARM?

Have we forgot what the banks did during the recent housing crash?

Based on the responses in this thread...and what's still going on.....yes, people forgot, or simply doing what they THINK is convenient to them/make sense.

Reality could be LOT different though hehe

 

[jaedaliu]

Why are people even considering an ARM?

Have we forgot what the banks did during the recent housing crash?

Educate me. What did they do?

My experience is word of mouth with 2 friends that had their rates lowered when their rate adjusted.

 

[Spungo]

Varying interest rates historically cost less than fixed rates but they have the added risk of potentially going the other way. Getting a fixed rate is basically the same as borrowing money and buying an insurance policy on it.

Educate me. What did they do?

My experience is word of mouth with 2 friends that had their rates lowered when their rate adjusted.

Rates went down and somehow everything exploded or something. People who got fixed mortgages during the boom are still paying very high interest rates. Guys who got the variable rates are paying very low rates right now.

 

[Texashiker]

Educate me. What did they do?

My experience is word of mouth with 2 friends that had their rates lowered when their rate adjusted.

Banks jacked their rates up until the buyer could no longer afford to note.

Article from 2008 - http://www.nytimes.com/2008/07/23/business/23rates.html?pagewanted=all&_r=0

 

[Blackjack200]

Educate me. What did they do?

Banks used to offer balloon loans with huge principal payments, like, the entire loan amount or some other huge chunk, due at a certain date. They also offered loans with a "teaser" rate that automatically adjusted up after a certain amount of time.

In a rapidly appreciating market, these products are actually fine, but when prices, fell they products played a role in the housing crisis.

Some posters in this thread are conflating these products with the 5/1 and 7/1 ARM products which are perfectly reasonable options for someone with a little more tolerance for uncertainty in future mortgage payments.

 

[Spungo]

Banks jacked their rates up until the buyer could no longer afford to note.

Article from 2008 - http://www.nytimes.com/2008/07/23/business/23rates.html?pagewanted=all&_r=0

Did you look at the graph? Interest rates were much higher for the entire decade before now. The people who got variable mortgage rates saw their payments go up then down between the boom and now. The guys who got fixed rates are still paying 6% on their mortgages even though the current borrowing rate is less than 4%

I can't imagine the rates staying this low forever, so now might be a good time for a fixed rate. Fixed rates are also better if you're going up to your eye balls in debt. When you're that deep in debt, even slight increases in the rates can sink you. If you're just borrowing $10, the interest rate could be anywhere from 0 to 100% and paying it back won't cause financial disaster.

 

[Vdubchaos]

Educate me. What did they do?

My experience is word of mouth with 2 friends that had their rates lowered when their rate adjusted.

WOW

You should not be even considering ANY loan without knowing what is going on int he world around you.

Seriously

 

[rcpratt]

WOW

You should not be even considering ANY loan without knowing what is going on int he world around you.

Seriously

You're missing the point.

 

[Texashiker]

Did you look at the graph? Interest rates were much higher for the entire decade before now.

If a bank can screw you over to make a dollar, they will.

 

[jaedaliu]

Banks jacked their rates up until the buyer could no longer afford to note.

Article from 2008 - http://www.nytimes.com/2008/07/23/business/23rates.html?pagewanted=all&_r=0

The problem isn't the bank, it's the borrower.

If you don't understand historical mortgage rates, and don't know how to structure your loan so that you can keep paying it, don't borrow the money. I don't think amdskip is going to be in that situation.

All that said, the PenFed 5/5 ARM posted by Elbryn is ridiculous. 2.5% for the first 5 years, then max of 4.5% when over half the loan is paid off, and amdskip will be done paying before the rate can adjust again. Seems like an amazing deal when compared to the 3.99% 30 year rate offered.