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

[usctrojancpa]

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.

It's all about time value of money....think about it this way....you can lock in a rate at 4% for 30 years today but you can get a 5-year ARM at 2.50% or a 7-year ARM around 3%.  Your payment will be hundreds of dollars lower for 5 or 7 years, along with the principal of the loan being paid down faster.  If LIBOR does adjust to 2.50% then your rate would go to 4.75% in year 6 or year 8 (the margin for ARM loans is generally 2.25%).  You add up all the amount that you have saved plus the additional principal paydown then subtract the slightly higher payment in year 6 or year 8.  Remember that the interest rate adjusts EVERY year so LIBOR can go up or down (it can only adjust up/down 5% in the first adjustment and up/down 2% in the subsequent adjustments).  Like I said, ARM loans are not for everyone (especially for people that don't understand how they work OR are stretching their financials by using one to qualify for a loan). 

 

[usctrojancpa]

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.

Translation:  if you are poor, don't get an arm.

Just like banks love to lend money to people who need it least.  haha

 

[jyeh74]

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.

It's all about time value of money....think about it this way....you can lock in a rate at 4% for 30 years today but you can get a 5-year ARM at 2.50% or a 7-year ARM around 3%.  Your payment will be hundreds of dollars lower for 5 or 7 years, along with the principal of the loan being paid down faster.  If LIBOR does adjust to 2.50% then your rate would go to 4.75% in year 6 or year 8 (the margin for ARM loans is generally 2.25%).  You add up all the amount that you have saved plus the additional principal paydown then subtract the slightly higher payment in year 6 or year 8.  Remember that the interest rate adjusts EVERY year so LIBOR can go up or down (it can only adjust up/down 5% in the first adjustment and up/down 2% in the subsequent adjustments).  Like I said, ARM loans are not for everyone (especially for people that don't understand how they work OR are stretching their financials by using one to qualify for a loan).

Most of the 7/1 arms I have seen are 2/2/6. Where are you getting 5/2?
2% in year 8, 2% in year 9 and 6% lifetime max.

 

[irvinehomeowner]

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.

It's all about time value of money....think about it this way....you can lock in a rate at 4% for 30 years today but you can get a 5-year ARM at 2.50% or a 7-year ARM around 3%.  Your payment will be hundreds of dollars lower for 5 or 7 years, along with the principal of the loan being paid down faster.  If LIBOR does adjust to 2.50% then your rate would go to 4.75% in year 6 or year 8 (the margin for ARM loans is generally 2.25%).  You add up all the amount that you have saved plus the additional principal paydown then subtract the slightly higher payment in year 6 or year 8.  Remember that the interest rate adjusts EVERY year so LIBOR can go up or down (it can only adjust up/down 5% in the first adjustment and up/down 2% in the subsequent adjustments).  Like I said, ARM loans are not for everyone (especially for people that don't understand how they work OR are stretching their financials by using one to qualify for a loan).

Most of the 7/1 arms I have seen are 2/2/6. Where are you getting 5/2?
2% in year 8, 2% in year 9 and 6% lifetime max.

Most of the ARMs I see are 2/2/5... but there are some that 5/2/5.

I would stay away from anything that has an initial rate adjustment higher than 2%.

 

[sgip]

Not always. Some ARM loans with higher caps also have lower start rates - ex:

3.000%            2/2/5
2.750%            5/2/5

Since both ARM loans will end up at the same point in year 2 - assuming a medium rise in rate scenario - having 5-7-10 years at .25% lower during the initial fixed period could work in a borrowers favor.

ARM loans can go in three directions - lower (unlikely but who knows), flat (possible) and higher (possible). "How much higher?" is the big risk question. For any borrower considering an ARM, I recommend asking yourself if you can handle a rate capped ARM loan payment in year 5, 7, or 10. The rate is unknown at that time, as well as your income, debt, and credit levels. If you're anticipating an income rise, or a child addition, those issues need to be considered closely when trying to guess the financial environment so far into the future.

My .02c

 

[jyeh74]

How does a 5/2/5 work if you start at 2.75% on a 7/1 ARM?

Does it mean in year 8, it can go to 7.25%
In year 9, it can go to 9.25%

Where is the lifetime max? 5%?

 

[qwerty]

How does a 5/2/5 work if you start at 2.75% on a 7/1 ARM?

Does it mean in year 8, it can go to 7.25%
In year 9, it can go to 9.25%

Where is the lifetime max? 5%?

year 8 can adjust at most 5%, so it can go to 7.75%, any year after year 8, it can adjust no more than 2% up or down per year, but never higher than the lifetime cap of 7.75%

 

[usctrojancpa]

How does a 5/2/5 work if you start at 2.75% on a 7/1 ARM?

Does it mean in year 8, it can go to 7.25%
In year 9, it can go to 9.25%

Where is the lifetime max? 5%?

The lifetime cap on ARM loans is generally start rate + 5% (some +6%).  That means if you got a 7-year ARM at 2.75%, the interest rate can never go above 7.75% over the life of the loan (assuming a 5% cap). 

 

[lovingit]

on a 7/1 ARM, does going with a 2/2/5 usually have a higher interest rate since the caps are more favorable in the year 8, than going with a 5/2/5?  I don't see why anyone would want a 5/2/5 when they could get a 2/2/5??