Morgage shopping, ARM or 30 Fixed?

[semtex]

House hunting is a long journey. Finally we are there. Now the question is ARM or 30 Fixed?

In fact, ARM never came to my mind until this morning. When I talked with one MBS guy in our company, he said maybe I should consider ARM. He bot his house at 2001 and used 5/1 ARM.

Here is our situation.
We will put 15% down and have a piggy loan. We have one 15 months CD matured at this Dec, it is good to cover the small load, 5% part.

I do some cash flow analysis. Assuming our current income, after max 401k and Roth(maybe could not do it, but I put 8k aside anyway), after the daily life expense, after all tax..., we could pay off the morgage in 7 years.

So 7/1 or 5/1 ARM looks attractive since we will get a better rate? By the way, my wife and I, we have nice FICO, both >740.

How you guys think?

[brewer12345]

I think a fixed loan is a no-brainer right now. Gives you lots of options for years to come and you pay a tiny premium for it (much less than usual).

[jIMOh]

Originally Posted by semtex

House hunting is a long journey. Finally we are there. Now the question is ARM or 30 Fixed?

In fact, ARM never came to my mind until this morning. When I talked with one MBS guy in our company, he said maybe I should consider ARM. He bot his house at 2001 and used 5/1 ARM.

Here is our situation.
We will put 15% down and have a piggy loan. We have one 15 months CD matured at this Dec, it is good to cover the small load, 5% part.

I do some cash flow analysis. Assuming our current income, after max 401k and Roth(maybe could not do it, but I put 8k aside anyway), after the daily life expense, after all tax..., we could pay off the morgage in 7 years.

So 7/1 or 5/1 ARM looks attractive since we will get a better rate? By the way, my wife and I, we have nice FICO, both >740.

How you guys think?

If a 5/1 or 7/1 interest rate looks appealing (relative to 30 year) and you can overpay the mortgage to pay either ARM off in 7 years, then look at a 15 yr fixed situation as well.

You know the 5/1, 7/1 are the lengths of time the rate is adjusting (I had a 15/1 ARM which adjusted once every year for 5 years, then ammortized at year 6-15). Make sure you understand the loan provisions.

a 7/1 ARM does not mean loan is paid off in 7 years... you know this, correct?

[cute fuzzy bunny]

I guess one big question is how long you plan to live in the new house? Most people move on average within 7 years.

If you're going to move in under 7 years, you're able and willing to pay the balance off within 7, and the rate difference between the 7/1 and a fixed 30 year. In fact if the 5/1 rate was a lot better than the 7/1, you might consider that and pay down a considerable amount of the balance at 5 years (since you wont be able to pay it all until 7) if the rate adjustment is unfavorable...otherwise let it ride.

Arms are always a bit dangerous due to the length of the loan. However (and brewer would be the expert here), the bond markets persistent inversion seems to be indicating that it doesnt think long rates will be rising.

[semtex]

Thank you, Brewer and jIMOh.

jIMOh, here is my understanding of 5/1. Fixed rate for 5 years, one year intermediate, then floating... Since bank only locked rate for 5 years, so the 5 years fixed rate is lower then 30 years fixed.

We could pay off the morgage in 7 years if all ifs there. But most cases, we will choose to pay off a big percentage first, for example 50%, then slow down, using the money on investment.

Brewer hit the point. 30 years fixed gives many choices, the premium is very small.

Question number 2, where to find best rate?

[semtex]

Cute Fuzzy Bunny, thanks.

We have no plan to move unless we are on FIRE

[cute fuzzy bunny]

Do not move if you're on FIRE. Drop and roll!

Seriously though, my old credit union (DCU) offered some pretty dang sweet 3/1, 5/1 and 7/1 options "on special". Four years ago they offered me a 3.98% 5/1 with no closing costs and I almost took it and invested the money. People here talked me out of it...which goes to show you that you should never listen to us 'experts' here I'd be up about 25%...

[cute fuzzy bunny]

Ick...I just looked at a couple of CU's known for good rates and their 5/1 and 7/1 rates vs their 30 year conforming sucked.

So unless your mortgage guy can find a sweet deal, the 30 year fixed looks like it might be your best bet.

[al_bundy]

if you think that rates will drop when your loan adjusts then go for it. if rates stay the same than you will be paying 7.5% when it adjusts. if rates go up, watch out.

[Hamlet]

Given the tiny current rate advantage of ARMs to a 30 year fixed, I would go fixed. I think a 30-year fixed mortgage is one of the best hedges against inflation around. If the government starts trying to print their way out of the SS and Medicare crisis that is coming up, I suspect I will be very happy to have a 30-year mortgage.

If inflation stays low, the extra cost to me will be pretty small.

[semtex]

Just called my CU. The best 30-year rate I could get is 6.5% with zero point. The guy told me that rate is up recently and it is high for a combo loan.

[haha]

With the massive twin deficits that we are running, our huge off books liabilities, and an intractable war going on and every body asleep at the wheel, I would say you would be crazy to take anything but a 30 year fixed. Think of it this way- the USA is almost the only place left in the world where this sort of loan is still available. If they don't want you to have it, it must be good!

Ha

[OAG]

Anyone can join Pentagon Federal Credit Union and they currently have 30 year Mortgages at 6.125% (6.158% APR). 5/1 are at 5.75% (6.904% APR). They offer good service and very reasonable locks on rates. Seems the 30 year fixed is the way to go. Web site is at www.penfed.org.

[semtex]

Thank you, OAG.

Yes, I just called PenFed. The rate sounds good.

[Alex]

Why not a neg-am 1% start rate loan??

just kidding..

How large is the loan? The larger the loan the more I like the ARM. Small differences in rate make large differences in payment on larger loans. Lets use the Pen Fed Rates:

Example 1:
$900,000 w/ 30 year fixed at 6.125% = $5,468.49 Principle and interest
$900,000 w/ 5/1 ARM at 5.75 =$5,252.16 Principle and interest
thats $216.33 per month x 12 months = 2595.96/ yr x 5 years = $12979.80
This seems like alot to pay for 'comfort'.

Example 2:
$250,000 w/ 30 year fixed at 6.125% = $1,519.03 Principle and interest
$250,000 w/ 5/1 ARM at 5.75 =$1,458.93 Principle and interest
thats $60.10 per month x 12 months = 721.2/ yr x 5 years = $3606.00

In this case, the savings are much smaller but certainly $3600 is not chump change. IMHO, If you plan on paying off the mortgage in 5-7 years anyway, why pay any extra interest??

Best of luck!

[Peaceful_Warrior]

Originally Posted by semtex

Cute Fuzzy Bunny, thanks.

We have no plan to move unless we are on FIRE

Why are you planning to pay off the mortgage early? Have you done the math to determine which gives you more assets?
- Paying off the loan early
- Paying off the loan as scheduled, then investing the difference

I found that paying off my mortgage early (or with a lump sum) was actually financially more costly than paying it for the long haul.

However, with different interest rates and investment assumptions, YMMV.

[REWahoo]

Originally Posted by Peaceful_Warrior

Why are you planning to pay off the mortgage early? Have you done the math to determine which gives you more assets?
- Paying off the loan early
- Paying off the loan as scheduled, then investing the difference

I found that paying off my mortgage early (or with a lump sum) was actually financially more costly than paying it for the long haul.

However, with different interest rates and investment assumptions, YMMV.

Oh boy....

[cute fuzzy bunny]

Only problem with using a mortgage as an inflation hedge is that the inflation works negatively on your portfolio while 'helping' you on the debt side. So for someone who mortgages their property and invests the proceeds, its a net zero effect.

[md4335]

Peaceful W is correct - 7/1 or 10/1 Interest only. Debt Obligation is to principle. In paying it down, on occasion, the monthly payment becomes smaller.

"If you paid, your mortgage off, it means you probably did not manage your funds efficiently over the years." - David Lereah (OK-So you could diatribe another thread about him, But?)

[aenlighten]

If it were a jumbo that you could refi into a conventional in a few years, I would say yes. Jumbos are pricey.