Analysis of PenFed's 5/5-year ARM Loan Product

[usctrojancpa]

So one of the folks enlightened us on the interest 5/5-year ARM loan product offered by PenFed.  I have attached a similar analysis as I did for the 7-year ARM loan to see how it looks.  The numbers look even better than the 7-year ARM with the breakeven being around 13-14 years depending on the discount rate used.  Below are some basic features/benefits of the 5/5-year ARM loan product through PenFed.

- Interest fixed for 5 years then adjusts once every 5 years
- It is a fully amortizing loan (not interest only, not an option ARM, or some other toxic loan)
- There's no prepayment penalty
- Interest rate will be lower than a 30-year fixed mortgage
- After 5 years the interest rate adjusts once every 5 years based upon 5-year CMT + margin
- Interest rate can only go up or down a maximum of 2% per 5 year adjustment
- Maximum interest rate is 5% above the start rate
- Loan balance at the end of year 5 and year 10 with the loan will be lower than with a 30-year fixed mortgage
- Using worst case scenario the breakeven point will be early in year 13-14
- Same loan prices for conforming and jumbo conforming loans
- PedFed picks up most of the closing costs

This is definitely a loan that I will be giving serious consideration when it's my time to buy.  The wider the spreads between the 5-year rate and 30-year rate the more it makes sense to get this loan product. 

 

[qwerty]

So one of the folks enlightened us on the interest 5/5-year ARM loan product offered by PenFed.  I have attached a similar analysis as I did for the 7-year ARM loan to see how it looks.  The numbers look even better than the 7-year ARM with the breakeven being around 13-14 years depending on the discount rate used.  Below are some basic features/benefits of the 5/5-year ARM loan product through PenFed.

- Interest fixed for 5 years then adjusts once every 5 years
- It is a fully amortizing loan (not interest only, not an option ARM, or some other toxic loan)
- There's no prepayment penalty
- Interest rate will be lower than a 30-year fixed mortgage
- After 5 years the interest rate adjusts once every 5 years based upon 5-year CMT + margin
- Interest rate can only go up or down a maximum of 2% per 5 year adjustment
- Maximum interest rate is 5% above the start rate
- Loan balance at the end of year 5 and year 10 with the loan will be lower than with a 30-year fixed mortgage
- Using worst case scenario the breakeven point will be early in year 13-14
- Same loan prices for conforming and jumbo conforming loans
- PedFed picks up most of the closing costs

This is definitely a loan that I will be giving serious consideration when it's my time to buy.  The wider the spreads between the 5-year rate and 30-year rate the more it makes sense to get this loan product. 

the only real reason not to use this product is if you plan to actually live there and pay it off over the 30 years.  not many people stay in a home for 13-14 years.

 

[usctrojancpa]

So one of the folks enlightened us on the interest 5/5-year ARM loan product offered by PenFed.  I have attached a similar analysis as I did for the 7-year ARM loan to see how it looks.  The numbers look even better than the 7-year ARM with the breakeven being around 13-14 years depending on the discount rate used.  Below are some basic features/benefits of the 5/5-year ARM loan product through PenFed.

- Interest fixed for 5 years then adjusts once every 5 years
- It is a fully amortizing loan (not interest only, not an option ARM, or some other toxic loan)
- There's no prepayment penalty
- Interest rate will be lower than a 30-year fixed mortgage
- After 5 years the interest rate adjusts once every 5 years based upon 5-year CMT + margin
- Interest rate can only go up or down a maximum of 2% per 5 year adjustment
- Maximum interest rate is 5% above the start rate
- Loan balance at the end of year 5 and year 10 with the loan will be lower than with a 30-year fixed mortgage
- Using worst case scenario the breakeven point will be early in year 13-14
- Same loan prices for conforming and jumbo conforming loans
- PedFed picks up most of the closing costs

This is definitely a loan that I will be giving serious consideration when it's my time to buy.  The wider the spreads between the 5-year rate and 30-year rate the more it makes sense to get this loan product. 

the only real reason not to use this product is if you plan to actually live there and pay it off over the 30 years.  not many people stay in a home for 13-14 years.

And that's using the worst case scenario.  What happens if we are still treading water in 5 years with no real inflation, the re-set be may less than 2% which will push out the breakeven that much further.  You can pay on the loan as if you were paying a 4.75% mortgage and that would lessen the shocks of the adjustments.  You can put your savings into some kind of investment and shoot to make a return that is higher that 3.25% and then have the lump sum there IF the adjustment goes against you.  There's a lot of ways to look at it, but this loan is a very interesting product and if used properly can be very beneficial. 

 

[Irvine2Irvine]

And that's using the worst case scenario.  What happens if we are still treading water in 5 years with no real inflation, the re-set be may less than 2% which will push out the breakeven that much further.  You can pay on the loan as if you were paying a 4.75% mortgage and that would lessen the shocks of the adjustments.  You can put your savings into some kind of investment and shoot to make a return that is higher that 3.25% and then have the lump sum there IF the adjustment goes against you.  There's a lot of ways to look at it, but this loan is a very interesting product and if used properly can be very beneficial.

Who knows?  Maybe the rate will spike up and come back down and be lower in 5yrs?? Not likely, but not impossible.

I was definitely going to use this loan until the 30yr fixed dropped during the aberration last September and the spread was only 0.5% between this loan and 30yr fixed.  Surprisingly, the Penfed loan is 0.25% lower than last September while the 30yr fixed has gone up 0.5%. 
Currently, this is extremely attractive with with a spread of 1.5%.

 

[sgip]

Non-lender fees paid by PenFed if you use their services. If this is the loan you're using see if the seller will agree to use PenFed's preferred service providers or at minimum match their credit.

It is a good loan that's for certain when you look simply at the cap. Let's say at 3.5% in 5 years the rate adjusts to a 5.5% rate loan. The average rate over those 10 years is 4.5%. You can get a similar 10/1 ARM at 4.25%-4.375% today.  Yes, you pay more in years 1-5, but can save more in the remaining years, albeit by fractions.

Per PenFed you must put 25% down to not have impounds. That's a big "meh" as impounds aren't really a bad thing per se, but best to disclose it up front.

My .02c

Soylent Green Is People.

 

[villiagepeople]

the lock is for 60 days for the rate they advertise (currently 3.5%)... also their minimum fico is 680, maximum 45% dti... same rate for jumbo (not sure how high).

 

[usctrojancpa]

the lock is for 60 days for the rate they advertise (currently 3.5%)... also their minimum fico is 680, maximum 45% dti... same rate for jumbo (not sure how high).

$417,000.01 to $729,750 is jumbo conforming now (might be going down to $625k later this year). 

 

[villiagepeople]

the lock is for 60 days for the rate they advertise (currently 3.5%)... also their minimum fico is 680, maximum 45% dti... same rate for jumbo (not sure how high).

$417,000.01 to $729,750 is jumbo conforming now (might be going down to $625k later this year).

since no one else offers this loan i'm assuming they are funding it themselves and don't need fannie/freddie or to package it into an mbs... does anyone know?  could that be why they don't care about the 417k conforming limit?

 

[sgip]

Yes. That's the reason they have unique caps, adjustment levels, and loan limits. Most Credit Unions have niche programs to meet the needs of their members. Schools First (formerly OCTFCU) had a number of minimum down no PMI loans over the years focusing on teachers and school staff income levels for example. If you scout around some of the major CU's (PENFED, Schools First, WESCOM, Partners (Disney), etc) you may find something worth joining the CU to take advantage of.

My .02c

 

[Irvine2Irvine]

Over the years, Penfed had some great products.  For a few years, they had the best 5 yr CD rates which I have used.
Right now they have a great auto loan rates.  2.49% for new OR used car loan.  You can refinance your current loan from another bank also.

 

[irvinehomeowner]

Right now they have a great auto loan rates.  2.49% for new OR used car loan.  You can refinance your current loan from another bank also.

Do you know if they'll finance a leased car?

 

[usctrojancpa]

Right now they have a great auto loan rates.  2.49% for new OR used car loan.  You can refinance your current loan from another bank also.

Do you know if they'll finance a leased car?

Right now they have a great auto loan rates.  2.49% for new OR used car loan.  You can refinance your current loan from another bank also.

Do you know if they'll finance a leased car?

They do, my good friend financed (bought out) his leased car using their loan.

 

[usctrojancpa]

Over the years, Penfed had some great products.  For a few years, they had the best 5 yr CD rates which I have used.
Right now they have a great auto loan rates.  2.49% for new OR used car loan.  You can refinance your current loan from another bank also.

I will be using their 2.49% used car loan.  The next best rate I could find was 3.99%.  I also picked up one of their reward credit cards when I'll get 5% back on gas. 

 

[boesjr]

Any thoughts on if this 5/5 arm rate could dip below the 3.5%, no points, mark?

 

[villiagepeople]

Any thoughts on if this 5/5 arm rate could dip below the 3.5%, no points, mark?

not with qe2 ending and it doesn't sound like the fed will do qe3...  unless foreign governments or private investors pick up the slack.

 

[Lallo]

Didn't know something like this even existed.  Is anyone eligible for these loans of is it for military, government employees, etc. only?

 

[irvinerealtor]

Didn't know something like this even existed.  Is anyone eligible for these loans of is it for military, government employees, etc. only?

Anyone is eligible for membership.  If you are part of a qualifying group, the membership is free.  If not, as is spelled out here in their eligibility disclaimer, you may join for a small donation of $15 or $20 depending upon how you choose.

I've had a couple of clients use this CU previously with mixed results.  One had a great experience and will likely be re-using one of their products in the next few months (although I don't believe it will be the 5-5 ARM).  The other had a terrible experience and got zero support from the loan processor.  This is not too different from any other lender that you might work with... YMMV.

-IrvineRealtor

 

[rickr]

Has anyone used this program recently.

Is it worth the risk of taking a 5/5 ARM loan when the 30 year conforming is so low (4.25%)?

Typically what is the spread that should be between a program like this and a 30 year conforming?

I am doing my math and the differences in payment is about $325 for the first 5 years. The breakeven point is less than 11 years. This is assuming that the 5/5 ARM starts at 3%. (it is currently at 3.25% but I would probably buy it down).  I can also save the $325 for the first five years which amounts to ~ $20K and pay down the principle.

Thanks in advance for the opinions.

 

[sgip]

If you have the discipline to prepay your loan, it's a great mortgage strategy. 5/1 ARM's aren't for the faint of heart, but if you stick to the plan you've laid out it's a win.

My .02c

Soylent Green Is People.

 

[Irvine2Irvine]

Has anyone used this program recently.

Is it worth the risk of taking a 5/5 ARM loan when the 30 year conforming is so low (4.25%)?

Typically what is the spread that should be between a program like this and a 30 year conforming?

I am doing my math and the differences in payment is about $325 for the first 5 years. The breakeven point is less than 11 years. This is assuming that the 5/5 ARM starts at 3%. (it is currently at 3.25% but I would probably buy it down).  I can also save the $325 for the first five years which amounts to ~ $20K and pay down the principle.

Thanks in advance for the opinions.

You said that the breakeven point is 11 years.  Is that including all the closing costs?  Penfed does not have any closing cost. 

In my opinion, it depends on how long you are going to stay at your house.  If you are staying less than the breakeven point, then it's a no brainer.  If you are staying longer, then only you can make the decision on the risk of the rising interest rate.