Best Loan Choice 10yr ARM - 7yr ARM - 5yr ARM ?

notTHEoc said:
OpenSky said:
Prop 13 + 30 year mortgage = forever hedge on house payment. That hedge is worth $220 for 5 years. Then after that 5 years, who knows where rates are? We bought our place as a long term investment - rents will go up, rates likely will too. Hedge and sleep at night.
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Agree. Unless you can very comfortably pay off your balance after 5/7 yrs (very small minority, even in Irvine), lot of risk to bear in ARMs. I really hope ~5 yrs from now, no one has to talk about 5-yr ARMs from 2012-2013 being a source of housing market weakness if payments go up and peeps forced to sell.  Your home is not an inflation hedge if you have an ARM.
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Who says you have to pay off your loan if interest rates move up?  You can do a partial paydown on the balance if the interest rate sets higher or just refi into another ARM.  There are several ways to keep the payments the same or lower.  The interest rate resets and the loan payment re-amortizes every 12 months once you get out of your fixed period. 
 
OpenSky said:
paperboyNC said:
notTHEoc said:
OpenSky said:
Prop 13 + 30 year mortgage = forever hedge on house payment. That hedge is worth $220 for 5 years. Then after that 5 years, who knows where rates are? We bought our place as a long term investment - rents will go up, rates likely will too. Hedge and sleep at night.
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Agree. Unless you can very comfortably pay off your balance after 5/7 yrs (very small minority, even in Irvine), lot of risk to bear in ARMs. I really hope ~5 yrs from now, no one has to talk about 5-yr ARMs from 2012-2013 being a source of housing market weakness if payments go up and peeps forced to sell.  Your home is not an inflation hedge if you have an ARM.
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The amount that your payment can go up is limited.  It can't jump straight from 3% to 7%.
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There's a lifetime cap that's generally pretty insane. Stairsteps generally are 1% per year.

An ARM is anything but a hedge. If you can't afford the house with fixed 30 year money, you shouldn't be buying that house.
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The lifetime cap is generally your start rate plus 5%.  I agree that an ARM is not a hedge but if you plan on renting your home (like I have done with a few of mine), the rent that you collect on the house is your inflation hedge and the rate on the ARM will move somewhat in tandem to the rent (i.e. if inflation heats up and rates rise then your rent will increase but if we get into another recession then your rent will be flat or come down and so will your ARM rate).  Not 1-for-1 but good enough for me.  ARMs are not for everyone and people who don't understand how they work shouldn't get them.  But for people that are good with their money and can put the savings to good use, an ARM is a great option.  Is there risk with an ARM? Of course but for some (including me) the rewards more than far outweigh the risks. 
 
USC,

Are the ARM products you reference all regular ARMs vs. Interest Only ARMs or have you used both before?
 
Logik said:
USC,

Are the ARM products you reference all regular ARMs vs. Interest Only ARMs or have you used both before?
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I'm mainly talking about regular ARM loans that have been around for decades.  I've used interest only ARMs before, but I prefer the regular ARM loans now as they have lower rates.
 
But if you take out a 7 1 arm, most likely interest rates,of Libor will increase in 8 years. Even if you refi to a 30 yr fixed, those rates will be higher. So if you plan on staying in the house, an arm doesnt make sense due to the likelihood of rates rising. 2.5% margins are high.
 
irvineboy said:
But if you take out a 7 1 arm, most likely interest rates,of Libor will increase in 8 years. Even if you refi to a 30 yr fixed, those rates will be higher. So if you plan on staying in the house, an arm doesnt make sense due to the likelihood of rates rising. 2.5% margins are high.
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And why will LIBOR rates rise?  By how much?  They have been under 1% for most of the past 6 years.  If you get a 7 year ARM loan it doesn't matter where interest rates go until till 2021.  If they do go much higher, pay down the loan or refi.  The vast majority of people sell their homes within 10 years which is the worst case scenario breakeven for a 7 year ARM loan.
 
I say Libor will rise bc they have,been low, so most likely will rise. Even if you refi, most likely a,30 yr fixed will be higher by then as well. We plan to stay here for 10 us years to raise a family.
 
irvineboy said:
I say Libor will rise bc they have,been low, so most likely will rise. Even if you refi, most likely a,30 yr fixed will be higher by then as well. We plan to stay here for 10 us years to raise a family.
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If LIBOR rises less than 5% then the breakeven point gets pushed out even further to 12-15 years.  The big benefit having an ARM loan with a lower rate is that you will pay down the loan faster.  I take the money that I save each month and invest it making quite a bit more than 4% per year.  If rates do spike up, I'll most likely pay down the loan so that may payment stays the same.  Sooner or later we'll have another recession and mortgage rates and LIBOR will head back down.  That being said, ARM loans are not for everyone (especially people who don't understand how they work or can't tolerate some interest rate risk).
 
I'm thinking if Libor rises to 2%, with a 2.5% margin, we are right around the 4-4.5%.  30 year fixed is 4% currently.  I anticipate it increasing in the next few years.  I guess I don't completely understand ARMs to know why anyone would go this route, if you plan to stay in a house 10-15 years.  Yes, you can refi but the rates will also increase by then.  You can pay down the loan to offset the higher rate, if you have the ability to.  I guess I haven't strayed away from the 30 year fixed to gamble on variable rates yet, but people seem to like them and I am trying to understand why.  If margins are lower, then it makes sense.
 
lovingit said:
I'm thinking if Libor rises to 2%, with a 2.5% margin, we are right around the 4-4.5%.  30 year fixed is 4% currently.  I anticipate it increasing in the next few years.  I guess I don't completely understand ARMs to know why anyone would go this route, if you plan to stay in a house 10-15 years.  Yes, you can refi but the rates will also increase by then.  You can pay down the loan to offset the higher rate, if you have the ability to.  I guess I haven't strayed away from the 30 year fixed to gamble on variable rates yet, but people seem to like them and I am trying to understand why.  If margins are lower, then it makes sense.
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I hope to be a move up buyer in the next 5 years. Prop 13 already discourages me because my property tax will go up. At least an ARM won't discourage me because of interest rates.

For me it's a win-win. I save money while I live in the house and I will still be free to move up.
 
an ARM is for the borrower who can absorb the higher payments when the reset happens or can pay down the loan when the reset happens. if you dont fall into either of these groups then you are a gambler and i like your style, but you should stick to the 30 year fixed, especially when rates are this low.
 
qwerty said:
an ARM is for the borrower who can absorb the higher payments when the reset happens or can pay down the loan when the reset happens. if you dont fall into either of these groups then you are a gambler and i like your style, but you should stick to the 30 year fixed, especially when rates are this low.
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I'm neither... but I want to be like ps9.
 
WTTCMN said:
qwerty said:
an ARM is for the borrower who can absorb the higher payments when the reset happens or can pay down the loan when the reset happens. if you dont fall into either of these groups then you are a gambler and i like your style, but you should stick to the 30 year fixed, especially when rates are this low.
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Translation:  if you are poor, don't get an arm.
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Must be me. (Low income category - all my mula goes to taxes) #maxedout401kcontrib
 
irvineboy said:
Trojan, do you think rates will continue to actually decline even more than now?
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I don't think LIBOR rates can decline much from here.  What I do think is that LIBOR rates won't rise a lot in the near/intermediate term.  I doubt we will see LIBOR in the last interest cycle (in the 5-6% range).  Do I think that LIBOR can go to 2% or 2.50% in the next few years, sure why not.  Will it go to 5% or 6%, I don't think so.
 
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