7/1 ARM vs. 10/1 ARM

A

alumiu

New member
All,

Through a corporate relocation I have the opportunity to secure some extremely low interest rates on ARM products as follows:

7/1 ARM - 2.25%

10/1 ARM - 2.75%

I have no idea when my next relocation will be if ever as I am in my mid-40's and have relocated to corporate headquarters.  I am inclined to go with the 10/1 ARM as if I am here longer term and have to refinance it will be on my own with no buy down from my company.  Since rates are this low and not going much lower then this then it probably makes sense to lock it up for the extra 3 years.  When that refinancing day comes or if I move I won't see rates like this again.

I am borrowing $270,000.

Which does the forum recommend the 10/1 or 7/1?  I just found this forum and I have to make the decision with my lender on Feb. 24th.

Using the spreadsheet I show the 7/1 as upside down in year 8 if the loan interest rate jumped the maximum of 5%.  I am comparing the 10/1 ARM to the 7/1 ARM and have modified the spreadsheet as such.  I am not even looking at the 30 year fixed as an option as the best rate I had on that was 3.75%.  Longest period of time I have ever been in the same home is 12 years.
 

Attachments

  • 7-1 ARM vs 10-1 ARM-1.xlsx
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I think this is hard for anybody to answer because we don't know how long you will stay put.  You need to lay odds on how long you think you will stay put, and then decide from there how conservative you need to be.
 
Would need more information to be able to help...

- Are both products otherwise the same? origination, points, fees, assumability?
- Can the 7/1 jump all the way to the increase cap (5% I assume from what you've shared so far) on the 8th year? Or is it an X% max increase per year?  I have a 2% max increase per year on my own adjustable loan, up to a max of 5% above the original 2.625% that we bought at.

-IrvineRealtor
 
IrvineRealtor said:
Would need more information to be able to help...

- Are both products otherwise the same? origination, points, fees, assumability?
- Can the 7/1 jump all the way to the increase cap (5% I assume from what you've shared so far) on the 8th year? Or is it an X% max increase per year?  I have a 2% max increase per year on my own adjustable loan, up to a max of 5% above the original 2.625% that we bought at.

-IrvineRealtor
Click to expand...
5, 7, 10 year ARM interest rates can adjust by a max of 5% for the first interest rate adjustment while subsequent annual adjustments are capped at a max of 2%.  You have to assume worst case scenario as a factor (even if unlikely) of going with an ARM to see how it compares to a fixed loan product. 
 
Take the 7, pay it like the 10 (+$70 per month), and if you still have the loan in year 8 AND if rates are higher, your adjustment won't be as rough as it might appear. Your balance should be about $12k lower or more if you do this versus paying the minimum.

Since this rate appears to be relocation company subsidized, what deal might they give on a 15 or 20 year fixed?

My .02c
 
Can't. The 7 year ARM has the lower payment. If you buy with the 10 year ARM loan and pay it like the payment of the 7 year ARM, you'll be foreclosed upon.  ;)
 
The rates on fixed products were as follows:

30 yr. fixed - 3.75%
20 yr. fixed - 3.625%
15 yr. fixed - 3.00%

I went with the 7/1 ARM at 2.25%.

 
alumiu said:
The rates on fixed products were as follows:

30 yr. fixed - 3.75%
20 yr. fixed - 3.625%
15 yr. fixed - 3.00%

I went with the 7/1 ARM at 2.25%.
Click to expand...
You got a great deal on the 7/1 ARM, a much better deal than any of the fixed loan rates.  Good choice...your breakeven assuming worst case scenario will be about 11 years (compared to getting a 30-year fixed loan).
 
There isn't much of a resale market for ARM loans. Some banks are loading up on them (ING for example), but the majority of lenders aren't being that generous with either the start rates or rebates. LIBOR rates are moving all over the place and trust in that index is beginning to waiver since it's beginning to look as if LIBOR can be manipulated by bankers across the pond.

You got a great deal. Congrats!

My .02c
 
irvinehomeowner said:
BofA seems high for their ARMs... no cost no points but their lowest is 3% for the 5/1.
Click to expand...
BofA rates and service leave a lot to be desired.  If I'm going to pay 3% for a 5/1 ARM, I'd much rather go with PenFed's 5/5 ARM loan.
 
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