ARM vs fixed mortgage

[Texashiker]

then max of 4.5% when over half the loan is paid off,

As long as there is a max then that is fine.

Its the people who had no max (or did not know what the contract said) who paid the ultimate price and ended up losing their homes.

 

[highland145]

30 years fixed - 3.99 $1263/mo
20 years fixed - 3.75 $1571/mo
20 years @ 3.99 $1604/mo
7/1 arm with 30 year amortization-3.0 7 years 3%..$3501/mo

10 years @3.75% $2651/mo
10 years @3% $2558/mo


Me, the 20 and pay at the 10 year payment.

 

[Humpy]

I've had an ARM since 2002. It's been great for me. Thanks to response to the financial collapse my payment has decreased more than it ever increased. I'm currently about $300 less per month than when I started.

 

[Drako]

Best mortgage rate I ever had was on a 7/1 ARM. In the adjustable period, my rate was 2 points above the 1-year T-Bill rate, which has been below .5% for some time now

 

[Spungo]

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

I trust them more than I trust most landlords. "You damaged this wall!" No I didn't, you damn idiot landlord. Thank god I took tons of pictures when moving in.

Maybe they're the same entities. The landlord trying to blame property damage on the tenant might be a banker during the day.

 

[alkemyst]

Why are people even considering an ARM?

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

Those were interest-only and reverse amortizing products.

A normal ARM is a good choice if you know you are moving within the ARM period and know your home will sell.

For most people, taking the 30 year mortgage and paying like you would at 15 years is a much safer and not much more expensive alternative.

 

[Tommy2000GT]

ARM.

Pay low interest now. Sell your house years later when it doubles in value and you would have made a lot money. Then you can move up to a better house.

 

[Naeeldar]

Those were interest-only and reverse amortizing products.

A normal ARM is a good choice if you know you are moving within the ARM period and know your home will sell.

For most people, taking the 30 year mortgage and paying like you would at 15 years is a much safer and not much more expensive alternative.

First accurate post. vdub linked an article that had nothing to do with arm loans.

The fact is most of this thread is filled with inaccuracy. People are quoting the implosion of a few years ago acting like it was arm loans that caused it. The reality is the bust was caused by two issues - the expectation that home values could and would only go up and poor underwriting (both personal and the securities being sold). Other things caused it to be a bit worse like interest only loans or the way appraisals worked but the reality is the bust was driven by these two factors. It was bad enough banks were issuing mortgages without any verification that the home owner made the income he said but then banks were selling off blocks of these mortgages and the buyers never checked to see about the real value of the homes either.

Anyway I would not take advice from this forum and go find somebody in person who is knowledgeable and has real experience.

 

[jagec]

As long as there is a max then that is fine.

Its the people who had no max (or did not know what the contract said) who paid the ultimate price and ended up losing their homes.

I don't think there is a loan written that has NO maximum interest rate.

Now, they did used to write option-ARMs, where you could choose to pay LESS than your interest charges and end up owing more than you bought the house for...but those are very different from traditional ARMs.

 

[swanysto]

ARM loans can be good. They are absolutely not the cause of the breakdown in the market. The breakdown came from greedy banks giving people loans they could not afford.

ARM is a roll the dice loan. Your rate is determined by the market(and your ability to pay on time), not by some guy in a bank that says, hmmm lets raise his rate cause we can. Unless you didn't have a lawyer look at your loan, you aren't going to get that.

 

[Attic]

Rates are going to go up. The question is by what magnitude. Not something you want to be risk prone to in the current environment of QE and a global economic crisis that is being heavily spun by major news outlets.

Buying at the top of the market is bad enough. Guarantee someone is licking their lips at the other side of this deal. Adding an ARM to that is asking for too much risk. As your rate increases the value of your home is going to go down.

6% is a conservative rate to expect to pay, could be as high as 10% if QE unwinding doesn't go according to script (nothing regarding it has). We are right in the wheelhouse for risk on affects from QE.

 

[Elbryn]

ARM loans can be good. They are absolutely not the cause of the breakdown in the market. The breakdown came from greedy banks giving people loans they could not afford.

ARM is a roll the dice loan. Your rate is determined by the market(and your ability to pay on time), not by some guy in a bank that says, hmmm lets raise his rate cause we can. Unless you didn't have a lawyer look at your loan, you aren't going to get that.

i'd argue that the blame is equally on the consumer agreeing to the loan. you're taking out a huge sum of money and dont take on a basic understanding of how the loan works?

in full disclosure of that penfed loan, the cap is not 4.5% but 7%. 5% max from the original rate with a 2% cap per change. so would take min 15 years to reach 7% at the max rate rise.

if the plan is to prepay and payoff in 10 years, particularly with a large prepay before year 5, the monthly payment would be drastically lower than a fixed rate at the 5 year rate change.

sure the interest rate is higher but you paid less than normal closing costs to get a lower than fixed rate, to allow more prepayment per monthly cycle, and at 5 years the monthly required payment is going to be far less than the fixed rate should you need to divert money elsewhere.

there's a place for arms and it can be beneficial in the right places. it's not good for someone who only wants to pay the minimum over a 30 year span. it can be very good for a prepayer. whether one should prepay or not is a wholly different question all together

 

[Elbryn]

some sample numbers using that spreadsheet i linked earlier.

120k prepay lump sum @ month 4
265k loan

fixed @ 4% with 4k closing cost
arm 5/5 @ 2.5% with 2% rate rise every 60 months capped at 7.5%

fixed @ 4% shows 1265.15 payment. takes 147 months to payoff.

arm payment = 1047, planned payment 1265.17, same as the fixed for 218.08 prepay per month. takes 138 months to payoff. in month 60 the min payment drops to 471.84 despite the 4.5% interest rate.

on the flip side, without the prepay the arm loses. if you only pay the fixed value 1265.17 the entire way, you will be paying more in min payment per month after year 10.