Analysis on a 7-year ARM mortgage versus 30-year fixed mortgage

sgip said:
The spreads between 30 fixed loans and ARM products has widened in the past few weeks. It used to be about .25 to .50 but now is upwards of .75 in rate between fixed and ARM's.  My guess is that lenders don't want long term 30 fixed on their books if rates rise.

The rate buydown costs for 30 fixed loans are also becoming really expensive (4.750% / -0- points vs 4.625% / 2.5 points for example).

My .02c

Soylent Green Is People.
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Yeah, the buydown for the ARM products is a fraction of what it is for a 30-year fixed loan recently.  You were correct that the 7-year ARM loan products do adjust by a max of 5% the first year and then 2% each year after.  I updated my schedule and it looks like the breakeven point looks to be early in year 11.
 
Although FHA mortgage insurance is now higher, for those putting a minimum down payment of less than 10%, there are FHA 7/1 ARM's. They have a 2 max 1st adjustment / 2 per year / 6 lifetime cap and run in the 4.0% range or lower with points.

(Example purposes only, APR's not calculated, YMMV, yadda, yadda)

My .02c.
 
sgip said:
Although FHA mortgage insurance is now higher, for those putting a minimum down payment of less than 10%, there are FHA 7/1 ARM's. They have a 2 max 1st adjustment / 2 per year / 6 lifetime cap and run in the 4.0% range or lower with points.

(Example purposes only, APR's not calculated, YMMV, yadda, yadda)

My .02c.
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Didn't the upfront mortgage insurance fee increase as well?  Can you pay the monthly mortgage insurance up-front like you can on conventional loans?
 
Thanks for all the posts on this, I'm thinking of refinancing again.  Looking on Zillow, two lenders have 7/1 ARMs for 3% with no fees.  The 5/1 ARM is 2.75% with no fees.  Cashcall and Amerisave are not even close to these rates.  If I refi my 15 year 3.625% loan now, it will decrease my monthly interest by $200-$300 dollars.  Principal payment will go down by $1000 as well but I can invest it or make a lump sum payment.  At the end of 7 or 5 years i would save more interest and potentially have less balance then my 15 year.  Who in their right minds would use a 30 year mortgage ever again? 
 
ps99472 said:
Thanks for all the posts on this, I'm thinking of refinancing again.  Looking on Zillow, two lenders have 7/1 ARMs for 3% with no fees.  The 5/1 ARM is 2.75% with no fees.  Cashcall and Amerisave are not even close to these rates.  If I refi my 15 year 3.625% loan now, it will decrease my monthly interest by $200-$300 dollars.  Principal payment will go down by $1000 as well but I can invest it or make a lump sum payment.  At the end of 7 or 5 years i would save more interest and potentially have less balance then my 15 year.  Who in their right minds would use a 30 year mortgage ever again? 
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Well, a 30-year fixed mortgage is a good choice for people who aren't as good with their money and are ultra risk averse.  Think of the 30-year mortgage as insurance where you are maxing everything out up to the hill.  I think a 7-year ARM loan is a great loan product if used properly and the risks and rewards are fully understood.  As you saw, using the worst case scenario it would take a little over 10 years for the 7-year ARM to breakeven with the 30-year mortgage with today's rates.  As the spread gets wider, the 5-year and 7-year ARM become more and more attractive.  Problem is that when people hear "ARM loan" they think of it as a toxic risky loan which is not true at all.

That being said, the rates you are seeing on Zillow do seem a little too good to be true.  I think you'll need to buy about 2pts to get down to 3% for a 7-year ARM but check with SGIP.
 
There's another option for people who are scared of uncertainty of adjustable rate.
Penfed Credit Union has 5/5, which adust every five years.  For example, rate adjusts after 5th, 10th, 15th, 20th, and 25th year only, not every year after 5th year like 5/1.
The interest rate can go up maximum of 2% every 5 years and the cap is 5% above the initial rate which is 3.25% with 0.5 point right now.  The rate is good and the Jumbo loan has the same rate. 

I did some calculation and it would take 14 years to break even for the worst case senario for following condition.
$500K loan  3.25% 5/5 loan vs 5.125% 30yr fixed
https://www.penfed.org/productsandrates/mortgages/mortgagerateslisting.asp
 
Irvine2Irvine said:
There's another option for people who are scared of uncertainty of adjustable rate.
Penfed Credit Union has 5/5, which adust every five years.  For example, rate adjusts after 5th, 10th, 15th, 20th, and 25th year only, not every year after 5th year like 5/1.
The interest rate can go up maximum of 2% every 5 years and the cap is 5% above the initial rate which is 3.25% with 0.5 point right now.  The rate is good and the Jumbo loan has the same rate. 

I did some calculation and it would take 14 years to break even for the worst case senario for following condition.
$500K loan  3.25% 5/5 loan vs 5.125% 30yr fixed
https://www.penfed.org/productsandrates/mortgages/mortgagerateslisting.asp
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Most of their interest rates are high, but the 5/5 ARM product is very interesting.  I'll have to look into when I'm ready to pull the trigger.  Looks like you have to add a 1% origination fee to most of the loans but they do pay for all of the closing costs....very interesting.
 
Most of their interest rates are high, but the 5/5 ARM product is very interesting.  I'll have to look into when I'm ready to pull the trigger.  Looks like you have to add a 1% origination fee to most of the loans but they do pay for all of the closing costs....very interesting.
[/quote]

I think the 1% origination fee is for fixed product only and the 5/5 ARM does not have any fee.
 
Irvine2Irvine said:
Most of their interest rates are high, but the 5/5 ARM product is very interesting.  I'll have to look into when I'm ready to pull the trigger.  Looks like you have to add a 1% origination fee to most of the loans but they do pay for all of the closing costs....very interesting.
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I think the 1% origination fee is for fixed product only and the 5/5 ARM does not have any fee.
[/quote]

based on what i read the 5/5 would not have the 1% origination fee.  the 5/5 seems to be the right amount of risk/reward given that if you get if you lock in 3.5, years 6-10 would only be at 5.5, by year 10 chances are you will not own the house. if we bought in the near future would likely put this at the top of the list.
 
Irvine2Irvine said:
Most of their interest rates are high, but the 5/5 ARM product is very interesting.  I'll have to look into when I'm ready to pull the trigger.  Looks like you have to add a 1% origination fee to most of the loans but they do pay for all of the closing costs....very interesting.
Click to expand...

I think the 1% origination fee is for fixed product only and the 5/5 ARM does not have any fee.
[/quote]


Ok, that makes the loan that much more attractive.  I like how they pay for the closing costs...it will allow me to buy down my interest rate more which means I'll have a lower maximum rate.  I do wonder what the index and margin they use for the 5/5 ARM re-sets.  Is it a 5-year CMT rate or 5-year treasury rate plus 2.25%?
 
USCTrojanCPA said:
Ok, that makes the loan that much more attractive.  I like how they pay for the closing costs...it will allow me to buy down my interest rate more which means I'll have a lower maximum rate.  I do wonder what the index and margin they use for the 5/5 ARM re-sets.  Is it a 5-year CMT rate or 5-year treasury rate plus 2.25%?
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I don't know how they come up with 5/5 rate, but it should not matter.  Currently, the rate is 3.25% with 0.5pts.  The maximum they can raise is 2% every 5 years with a cap of 5% above the initial rate, which makes the max rate 8.25%.

There are bunch of my coworkers who got this loan after I told them about it.  They are engineers, so they know their number.  It's really attractive if you are not going to stay at your house for more than 15 years.  I heard that most people don't stay that long at a house.
 
USCTM - The UFMIP did not change. MMI (Monthly Mortgage Insurance) increased by .25btps across the board.

The re-set is based on the 5 yr CMT.

Irvine2Irvine and USCTM - all loans have origination fees. They cannot be disguised any more. Either the lender is paying it through the rate, or you are paying for it in order to get a lower rate. Come to think of it, no matter what YOU are paying the lenders origination fee. If you take a higher rate you're paying the origination fee in the long run with your higher rate. Of course since the loan adjusts in 5 or 7 years it all depends on when the break even point it. The bottom line: don't accept the tall tale that your rate does not have any fees. Once you get the 2010 Good Faith Estimate it will show all fees disclosed as either lender paid or borrower paid.

My .02c

Soylent Green Is People
 
Irvine2Irvine said:
USCTrojanCPA said:
Ok, that makes the loan that much more attractive.  I like how they pay for the closing costs...it will allow me to buy down my interest rate more which means I'll have a lower maximum rate.  I do wonder what the index and margin they use for the 5/5 ARM re-sets.  Is it a 5-year CMT rate or 5-year treasury rate plus 2.25%?
Click to expand...

I don't know how they come up with 5/5 rate, but it should not matter.  Currently, the rate is 3.25% with 0.5pts.  The maximum they can raise is 2% every 5 years with a cap of 5% above the initial rate, which makes the max rate 8.25%.

There are bunch of my coworkers who got this loan after I told them about it.  They are engineers, so they know their number.  It's really attractive if you are not going to stay at your house for more than 15 years.  I heard that most people don't stay that long at a house.
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For my buyers who decide to go with that loan program, they should buy the interest down with my credit and hopefully get a rate of 3% or less.  Then they are effectively guaranteed a weighted average interest of less than 4% over 10 years assuming the worst case scenario.  I'll have to call PenFed and get more details about the loan.  I got my car loan from them and was very happy with their customer service.
 
USCTrojanCPA said:
ps99472 said:
Thanks for all the posts on this, I'm thinking of refinancing again.  Looking on Zillow, two lenders have 7/1 ARMs for 3% with no fees.  The 5/1 ARM is 2.75% with no fees.  Cashcall and Amerisave are not even close to these rates.  If I refi my 15 year 3.625% loan now, it will decrease my monthly interest by $200-$300 dollars.  Principal payment will go down by $1000 as well but I can invest it or make a lump sum payment.  At the end of 7 or 5 years i would save more interest and potentially have less balance then my 15 year.  Who in their right minds would use a 30 year mortgage ever again? 
Click to expand...
Well, a 30-year fixed mortgage is a good choice for people who aren't as good with their money and are ultra risk averse.  Think of the 30-year mortgage as insurance where you are maxing everything out up to the hill.  I think a 7-year ARM loan is a great loan product if used properly and the risks and rewards are fully understood.  As you saw, using the worst case scenario it would take a little over 10 years for the 7-year ARM to breakeven with the 30-year mortgage with today's rates.  As the spread gets wider, the 5-year and 7-year ARM become more and more attractive.  Problem is that when people hear "ARM loan" they think of it as a toxic risky loan which is not true at all.

That being said, the rates you are seeing on Zillow do seem a little too good to be true.  I think you'll need to buy about 2pts to get down to 3% for a 7-year ARM but check with SGIP.
Click to expand...

just got a response from a zillow lender..  3.00% 7/1 ARM, $485 total "out-the-door" fees, requires credit >760, LTV <70%, DTI < 45%, requires impounds.  I'm going to apply and see how this turns out. 
 
Trojan and SGIP.

Today i just found out that I am approved for the loan and given two choices.

My purchase price is $488,068, therefore the 80% loan value is $390,455.  I am approved for the full 80% for the 7 year ARM at 3.875%, but can only get a loan up to $360k for a 30 year fixed product. Unfortunately my wife has no income and even though I have a two year signed lease contract for my townhome here in Chicago where my monthly rent would pay for the entire carrying cost, the bank won't give me credit.

I am little disappointed with the outcome ... but what is a Panda supposed to do in this situation? I can't believe the townhome that I am living in right now was recently appraised for $340,000 and I am paying $8,000 in property taxes. What the PHO right? The state of Illinois is broke as a joke and I am so happy that i am getting the heck out of here. Atleast in Irvine.. you get sunshine and good schools for the mello roos tax.

My question is this? Should I take the 7 year ARM option for the full $390k or take the 30 year fixed option for $360k? Trojan, I am thinking about doing what one of your buyers is doing paying off the 7 year ARM like I would with a 4.75% 30 year fixed and paying off the entire mortgage after year 8.

After my move to Georgia, if both my rental properties are rented... will I have the option of refinancing again for the full 80% of the loan with the 30 year fixed?  I guess what I am asking is if the banks will care if there is 30%  equity in my rental properties if they are already rented if I decide to refinance to a 30 year product.

With this uncertain economic environment, I want to put as little cash as possible into real estate if i can. I know what what is killing my ratos right now is that the bank is assuming that I am paying 2 mortgages with my single income.  Geez... give me a break.
 
Sheesh.. that's a $200 difference in payment from a 3.875 7/1 and a 4.75% 30 for the same loan amount.

If this was me, I'd take the 7/1 and pay it like a 30. You'll have a $309,000 balance (or so) in year 7. Let's say rates pop up to 8%. your payment will have gone from $1880 (or so) to $2,541. In 7 years you'll have a much different income structure and may be able to absorb that kind of increase. This assumes you've not refinanced, that you've not made additional prepayments, or even still own the home. That's quite a few uncertainties to balance against an ARM loan.

A 7/1 ARM at 3.875% today - if you haven't locked - is well beyond a zero point loan. The remaining rebate is juicy enough to cover some of your closing fees. Need to take that into account as well.

If you have to have the 30 fixed, find a $200 per month debt to pay off or refinance some payment on a fixed item (car loan?) down by $200. Spoke today with a buyer who has an $875 car payment that may refinance it to lower their DTI.

I can't imagine paying that for a car. At $875 per month that Range Rover Sport better run like a top!
 
SGIP if i decided to refinance to a 30 year product for the full 80% value later down the road, will the banks care whether i have 30% equity in my two rental properties if they are already rented out by the time i seek out a refinance. That was the reason i couldn't get any credit for my townhome that will rented in July 1st, 2011 since i only have 25% equity in it.
 
Future rent cannot be counted unless you meet several layers of important underwriter requirements:

1) Need a deposit check from the renters, cashed through your account.
2) Need a 24 month history of being a property manager.
3) Must have Rent Loss Insurance (Freddie Mac requirement, but not FNMA)
4) 25% equity.
5) 3 months PITI HOA for all properties - rentals and primary.

It's strange though in that if you have 1 month of rent reported on your 2010 returns for any of your departure residences, you can have the income counted, you don't need equity in the property, you don't need 24 months experience, and the only payment evidence you need is a bank statement with a rent deposit or two.

Hope this helps,

SGIP
 
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