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

SGIP. that is strange. I do meet all 5 criterias. In need to talk to the loan office about that.  I have no idea why the bank is not willing to to give me credit for my future rent as I have a 2 year signed contract with deposit check in my hand for my current primary residence.

This will be my last question. I am trying to learn more about how the 7 year ARM works. If my balance is $309,000 by 2018 and the interest rate is 8% at the time, will my loan start to amortize based on the $309,000 amount. If I make a $100,000 payment towards my balance one month before my 7 year ARM expires (with a balance of $209,000) would my monthly mortgage payments drop to $1880/month or less. Will the payments change every year from years 8,9,10, etc?
 
The loan starts amortizing at the $308k balance for the remaining 23 years. If you make a prepayment of note - generally $10,000 or more - most servicing companies will adjust your payments based on the new lower balance. You have to contact your service company before you send in your $$$ to ensure this will be done. You do not need to make that payment right before or after any adjustment in your rate. ARM loans do adjust each year after the fixed period based on the rate and margin at that time, plus whatever your principal balance is. The rate can move no more than 2% per year, but the payment can move by any amount if you pre-pay your balance.

My .02c

Soylent Green Is People.
 
I did some comparing with Penfed's 5/5, 5/1 ARM, 7/1 ARM, and my current 15 yr fixed.  Penfed's is definitely the most expensive in terms of interest and remaining principal within the first 5-7 years.  I'm currently in the process of refi to a 5/1 ARM at 2.625% with total fees (out the door) of $10.  I do have to impound taxes and insurance but I hear you can cancel that later?  I don't plan to stay in the current house for more then 5 years.  I'll save about $1300 a month from my current 15 yr fixed payment, if I lump sum at the end of 5 yr I'll be at lower principal then with the 15yr.  This is done with a broker thru Zillow's mortgage site.  Hopefully this works out.  Also, his 7/1 ARM is at 2.875% with total fees of $485.
 
More fuel for the fire if you're considering ZMM.
http://www.thetruthaboutmortgage.com/zillow-mortgage-marketplace-giving-away-free-lowes-gift-cards/

Think of what's going on here: A lender is quoting a 2.875% rate for 7 years.

1) The cost of their funds could be .25%
2) The expense of servicing is about 1%
3) They are rebating roughly 2% for closing fees (+ / -)
4) Since you have to take impounds, the lender must pay 2% interest on the escrowed funds.

The total expense is about 3.375% (again + /-) making the net yield close to -.25% to -.375%

Someone out there is willing to accept a net -.25% yield on their Mortgage Backed Securities for 7 or so years in a 2.0% or higher per year inflationary environment. That's not an asset I'd be too proud of owning.

Now throw on a $1,000 Lowes Gift Card if you've got a $417,000 loan.

This is nearly as crazy as Cash Call's 125% Loan To Value 2nd mortgage promotion now.

My .02c

Soylent Green Is People.
 
I'm a babe in the woods, but SGIP--

isn't that 3.375% for year 1?  that 2% for closing fees (is this escrow/transfer taxes?) is for the first year only, it seems to me, and after that their expenses would be fed funds pus 1%, no?

Thanks again for sharing your insights!
 
You are correct. The 2% paid by the lender is for expenses generated in the first year originating the loan, then 1% thereafter for servicing, etc. What's a bit hard to describe with certainty is if the loan HAS 2.0% to give away to begin with. The margins on ARM loans are very, very thin so some of that up front 2% perhaps is coming from some other business line just to keep applications coming through the door. I've not listed trading/securitizing/hedging/loan buyback expenses and other costs not seen by the consumer but well known to MBS traders.

These loans are underwater from the get go and with inflation what it is today I don't know what these banks are thinking when they're originate these DOA mortgages. Same sort of thing passed through my mind in 2006 when the Option ARM products began to flood the market.

My .02c

Soylent Green Is People.
 
Sign my loan docs today... 5/1 ARM 2.625% (no fees, broker even covered the existing mortgage payoff fees).  Lender is Provident.. notary mentioned been getting alot of business for this lender in the Irvine area.  Does require impounds though..
 
Most refi shops are super agressive with their ARM loan products now to keep business coming in the doors. The available pool of refinanceable home owners has shrunk considerably which is why many lenders are pushing either low rate ARM's or 10 year fixed loans. Those who could have refinanced did already.

The deal is likely available for purchase loans, but in a refi heavy shop you need to be pretty careful that your loan will get the same attention. Some places don't even take purchase loans because of the number of third parties involved.

My .02c

Soylent Green Is People.
 
irvinehomeowner said:
@ps9:

You're talking about a refi right?
Click to expand...

Huh just thanked your posts again by accident, stupid iPad fat thumbs...

Anyways, yes it is for refi, FICO 760+, 80% LTV, impounds, conforming, etc.
 
Update on Panda:

I locked in a 30 year fixed rate 4.25% rate for a full 80% loan value of $390,454. The mortgage broker submitted my file more than 12 times as the underwriters refused to lend me more than $360,000, but i guess persistence does pay off.

SGIP, Trojanman, and IR2... Thank you for all your help. I had close call where i almost lost the entire 80% of the broker's coop rebate as my buyer agent's broker filed bankruptcy. I have to admit i did freak out, but IR2 and Trojan advised me what actions i needed to take. I am very grateful for IR2 and Trojan's help through the stressful process which is soon coming to an end..

SGIP.. thank you so much for sparing your time to answer so many of loans questions. Thank you!  :D

My new home closing is in June 30th... and my wife and I packing up with the 2 little ones running around. I have a walk thru on the 14th and will definitely post up pictures of how the final product turned out.   
 
I had 2 fairly conservative buyers recently opt to go with a 7-year ARM versus a 30-year fixed loan.  With my commission rebate, they are buying their rates down into the mid-2% range. 
 
How does the 7 year compare to the 5 year?  I remember you saying that for yourself you would highly consider the 5/5 Penfed.  Which do you go with?

I just use this as an easy example:
http://www.schoolsfirstfcu.org/rates_intranet/www_rerates.asp

What are the things to look at when deciding a 5 year at 3% vs. 7 year at 3.5%?  Is it just the risk factor of the rate change? or if you plan to move/refinance within 5 or 7 years?
 
26inirvine said:
How does the 7 year compare to the 5 year?  I remember you saying that for yourself you would highly consider the 5/5 Penfed.  Which do you go with?

I just use this as an easy example:
http://www.schoolsfirstfcu.org/rates_intranet/www_rerates.asp

What are the things to look at when deciding a 5 year at 3% vs. 7 year at 3.5%?  Is it just the risk factor of the rate change? or if you plan to move/refinance within 5 or 7 years?
Click to expand...
A regular 5-year ARM and 7-year ARM work the same exact way, except that the rate is different for 5 or 7 years.  Both have the same rate adjustment limits and max rate limit (5% + start rate).  I think that the rates between the two are close enough where I would go with the 7 year term to get those extra 2 years.  The 5/5 ARM rate needs to come down to make sense at this point...not sure why the credit unions haven't lowered their rate for that program...they are almost .75% higher than you'll find on a regular 5-year ARM.  Besides, I rather have the interest rate adjust on a shorter term index like the the 1-year LIBOR than a 5-year CMT as I don't see much inflation out there in the near term future.
 
USCTrojanCPA said:
26inirvine said:
How does the 7 year compare to the 5 year?  I remember you saying that for yourself you would highly consider the 5/5 Penfed.  Which do you go with?

I just use this as an easy example:
http://www.schoolsfirstfcu.org/rates_intranet/www_rerates.asp

What are the things to look at when deciding a 5 year at 3% vs. 7 year at 3.5%?  Is it just the risk factor of the rate change? or if you plan to move/refinance within 5 or 7 years?
Click to expand...
A regular 5-year ARM and 7-year ARM work the same exact way, except that the rate is different for 5 or 7 years.  Both have the same rate adjustment limits and max rate limit (5% + start rate).  I think that the rates between the two are close enough where I would go with the 7 year term to get those extra 2 years.  The 5/5 ARM rate needs to come down to make sense at this point...not sure why the credit unions haven't lowered their rate for that program...they are almost .75% higher than you'll find on a regular 5-year ARM.  Besides, I rather have the interest rate adjust on a shorter term index like the the 1-year LIBOR than a 5-year CMT as I don't see much inflation out there in the near term future.
Click to expand...

one other difference for the 5/1 vs 7/1 with the 5/1 you have to qualify with the current rate +2%... with the 7/1 you only need to qualify with the current rate.  (not sure if this is the case with everyone, but for me that's what the loan lady said, but i ended up doing a 10/1, which is something you can consider, it was something like .25% diff between the 10/1 and 7/1 at the time i bought)
 
great info guys.  thanks.  5/1's are going for 2.25% at 0 points?  I'm looking at bank rate and don't see it.  Am i looking at the wrong place?  lowest i see is 2.6/2.7
 
26inirvine said:
great info guys.  thanks.  5/1's are going for 2.25% at 0 points?  I'm looking at bank rate and don't see it.  Am i looking at the wrong place?  lowest i see is 2.6/2.7
Click to expand...
Earlier posts in this thread seem to indicate 5/1s in the mid 2s for 0 points. I think you have to buy down to 2.25%.

But I read rates dropped again... soon... banks will pay us interest to borrow their money (I wish).
 
I know it's fighting against common perception, but rates don't move the cost of a rate does. What was 2.5% for .25 in fee now is 2.5% for -0- points, 2.375% for .25 in fee.

Those lenders swooping up the ARM business are going to make a killing in this rate cycle. Provident, American InterBank, PenFed, and a few other smallish banks are really pushing their ARM costs so low one wonders if there is such a thing as a bottom in rates. Their spreads are so narrow that any move up in interest rates will tip their balance sheet into real trouble. That overview has no impact on your borrowing ability or loan servicing so by all means get 'em while you can.  A couple of years from now if rates rise it will be the FDIC's issue.

Another curious thought on these low rates, a question answerable by USCTrojanCPA: At some point in time the tax deductible interest will be so low that the highly promoted benefit of "housing as a tax shelter" could negate itself. Are we there yet with 2.5% or so interest rates?

My .02c

Soylent Green Is People. 
 
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