usctrojancpa
Well-known member
A few of my clients have seriously considered or opted for a 7-year ARM mortgage versus the 30-year fixed. I think everyone knows how a 30-year mortgage works, so I'll outline some of the basic points of the 7-year ARM below:
- Interest fixed for 7 years then adjusts annually
- It is a fully amortizing loan (not interest only, not an option ARM, or some other toxic loan)
- There's no prepayment penalty
- Interest rate will be lower than a 30-year fixed mortgage
- After 7 years the interest rate adjusts once a year based upon 1-year LIBOR + 2.25% (1-year LIBOR is currently 0.78%)
- Interest rate can only go up or down a maximum of 2% per year except for the first year where it can adjust 5%
- Maximum interest rate is 5% above the start rate
- Loan balance at the end of year 7 with a 7-year ARM will be lower than with a 30-year fixed mortgage
- Using worst case scenario of the max rate (start rate + 5%) the breakeven point will be early in year 11
I have attached a calculation that I prepared for a few of my buyers to show that assuming the worst case scenario, the breakeven point between the two loans happens between year 11 and year 12. This is a great loan product for people who are good with their money, plan on accelerating their loan payoff, and/or believe they will sell their home in less than 12 years (on average people sell their homes after about 6-7 years). My buyers have taken advantage of my commission rebate to buy down the interest rate down to 3.50% and lower. Note that the interest rate margin between the two loans for a jumbo conforming loan (417,001 to 729,750) is lower and you will have to put at least 75% down to be able to get the loan (only 20% needs to be put down if the loan amount if $417,000 or less).
- Interest fixed for 7 years then adjusts annually
- It is a fully amortizing loan (not interest only, not an option ARM, or some other toxic loan)
- There's no prepayment penalty
- Interest rate will be lower than a 30-year fixed mortgage
- After 7 years the interest rate adjusts once a year based upon 1-year LIBOR + 2.25% (1-year LIBOR is currently 0.78%)
- Interest rate can only go up or down a maximum of 2% per year except for the first year where it can adjust 5%
- Maximum interest rate is 5% above the start rate
- Loan balance at the end of year 7 with a 7-year ARM will be lower than with a 30-year fixed mortgage
- Using worst case scenario of the max rate (start rate + 5%) the breakeven point will be early in year 11
I have attached a calculation that I prepared for a few of my buyers to show that assuming the worst case scenario, the breakeven point between the two loans happens between year 11 and year 12. This is a great loan product for people who are good with their money, plan on accelerating their loan payoff, and/or believe they will sell their home in less than 12 years (on average people sell their homes after about 6-7 years). My buyers have taken advantage of my commission rebate to buy down the interest rate down to 3.50% and lower. Note that the interest rate margin between the two loans for a jumbo conforming loan (417,001 to 729,750) is lower and you will have to put at least 75% down to be able to get the loan (only 20% needs to be put down if the loan amount if $417,000 or less).