Anyone use 5/1 or 7/1 ARMs

J

jyeh74

New member
I am thinking of doing an ARM on a jumbo loan, even though I plan to stay in the house for more than the time of the loan.  30 year fixed on a jumbo are about 4.5% + but a 5/1 ARM is 3.125% and a 7/1 ARM is 3.5%  This makes a huge difference on a loan but in the 6th (or 8th year), they add another 2 pts.  So it can go to 5.125% or 5.5% after the ARM is up.  There is a maximum of 5 pts throughout the life of the loan.  So does that mean in the 7th (or 9th year) they add another 5.125% + 2 pts = 7.125% (5.5% + 2 pts = 7.5%)?  Then another 1 pt in the final year?

Anyone do this vs the 30 year fixed who plan to stay in the house for 10+ years?
 
I haven't but have been tempted by the Penfed 5/5.  Would like to see if anyone went that route in addition to either the 5/1 or the 7/1
 
More and more buyers are looking at ARM loans now. The PenFed loan is great what with an average rate over 10 years below 4%.

With any ARM loan you have to measure what the pain (if any) would be once it adjusts, and how you expect to absorb the difference. No one knows where loan rates will be in a decade so trying to plan your finances past the first 8-10 years on a program / rate comparison basis is often a waste of energy. Yes, on a fixed rate you'll have the same payment. You could also with an ARM. You just don't know.

When we close PenFed ARM's, I tell my clients to pay the loan like a 30 fixed whenever possible. When the loan adjusts, and if the adjustment is higher, the change won't be as significant. $100 here, $1,000 there... it adds up fairly quickly and to your benefit.

My .02c
 
I heard that PenFed doesn't do new build condos.

Soylent Green Is People said:
More and more buyers are looking at ARM loans now. The PenFed loan is great what with an average rate over 10 years below 4%.

With any ARM loan you have to measure what the pain (if any) would be once it adjusts, and how you expect to absorb the difference. No one knows where loan rates will be in a decade so trying to plan your finances past the first 8-10 years on a program / rate comparison basis is often a waste of energy. Yes, on a fixed rate you'll have the same payment. You could also with an ARM. You just don't know.

When we close PenFed ARM's, I tell my clients to pay the loan like a 30 fixed whenever possible. When the loan adjusts, and if the adjustment is higher, the change won't be as significant. $100 here, $1,000 there... it adds up fairly quickly and to your benefit.

My .02c
Click to expand...
 
Soylent Green Is People said:
More and more buyers are looking at ARM loans now. The PenFed loan is great what with an average rate over 10 years below 4%.

With any ARM loan you have to measure what the pain (if any) would be once it adjusts, and how you expect to absorb the difference. No one knows where loan rates will be in a decade so trying to plan your finances past the first 8-10 years on a program / rate comparison basis is often a waste of energy. Yes, on a fixed rate you'll have the same payment. You could also with an ARM. You just don't know.

When we close PenFed ARM's, I tell my clients to pay the loan like a 30 fixed whenever possible. When the loan adjusts, and if the adjustment is higher, the change won't be as significant. $100 here, $1,000 there... it adds up fairly quickly and to your benefit.

My .02c
Click to expand...


Worst case scenario, 5pts + 3.125% = 8.125% over the first 8 years.  Assuming 30 year fixed are even higher than that.

But can't you technically refi to another ARM after 5 years?
 
I have all kinds of loans on my properties....5/1 ARM, 5/5 ARM, 7/1 ARM, and 30-year fixed.  I have the ARM loans because of two reasons....1) I can make a higher return elsewhere and 2) I can handle the payment increase Thand understand the ARM product (the adjustments and what the rate is based off of).  There are benefits to ARM loans (lower interest rates and quicker repayment of principal) and it's understanding the risks (possible higher rates).  Keep in mind that most ARM loans are based upon the 1-year LIBOR plus a 2.25% margin when the rate adjusts.  The 1-year LIBOR rate is somewhat tied in to the Fed Funds Rate and not the 10-year bond.  If you had an ARM adjust today, your rate would be 2.875%.  I would actually love to be on a floating rate that's based on a short term rate because I don't see the Fed raising rates for a long, long time.
 
irvineboy said:
Soylent Green Is People said:
More and more buyers are looking at ARM loans now. The PenFed loan is great what with an average rate over 10 years below 4%.

With any ARM loan you have to measure what the pain (if any) would be once it adjusts, and how you expect to absorb the difference. No one knows where loan rates will be in a decade so trying to plan your finances past the first 8-10 years on a program / rate comparison basis is often a waste of energy. Yes, on a fixed rate you'll have the same payment. You could also with an ARM. You just don't know.

When we close PenFed ARM's, I tell my clients to pay the loan like a 30 fixed whenever possible. When the loan adjusts, and if the adjustment is higher, the change won't be as significant. $100 here, $1,000 there... it adds up fairly quickly and to your benefit.

My .02c
Click to expand...


Worst case scenario, 5pts + 3.125% = 8.125% over the first 8 years.  Assuming 30 year fixed are even higher than that.

But can't you technically refi to another ARM after 5 years?
Click to expand...
Yeah, you can keep refinancing into ARM loans ANYTIME...they do not have a early prepayment penalty. 
 
You can refi at anytime provided you meet the

Equity ratio requirements
Asset requirements
Income requirements
And
Debt service requirement


Agree short term interest is going no where, long term is a different story and 5 years is a long time
 
Ready2Downsize said:
Doesn't the Pen Fed loan have a prepayment penalty if it's refinanced or paid off within the first three years?
Click to expand...

it relates to closing costs:

Reimbursement of Closing Costs: If you pay this loan off and close the account earlier than the 36-month anniversary date of the loan closing, you will be obligated to pay PenFed a prorated amount of the closing cost credit received from PenFed. This amount will be added to any loan payoff amount requested prior to the 36 month anniversary date.  The reimbursement amount will be prorated in equal amounts on a monthly basis. Closing costs credit to be reimbursed include all closing costs paid by PenFed.
 
So in other words, it's not called a prepayment penalty but it's a money out of one's pocket for paying off the loan within 36 months of acquiring it. Good to know no one would be penalized for refinancing within 36 months.
 
irvineboy said:
But can't you technically refi to another ARM after 5 years?
Click to expand...
This is actually an interesting strategy.

It may not work for people who don't move but it might as long as the product stays around, you could construct a pseudo 30-year fixed scenario:

1. Do a 7/1 ARM, then in 7 years, if the first adjustment rate is higher than the 7/1 ARMs at that time, refi (assuming you qualify, which should be possible even if your home value stayed the same and you put 20% down initially, year 7 should have you in the low 70% balance).

2. Then, after the next 7 years, depending on what rates are, refi into a 15-year fixed which we can assume will be lower than the 30-year fixed rate and you've basically created a low rate 29-year fixed loan.

But there could be issues with income and the other things nosuchreality mentioned and would probably work out better if you are younger.

My better half thinks that if we buy a bigger home we should keep it forever so that we can give it to our kids... but I don't think our kids are interested in living in their childhood home when they are older. I would probably downsize or move to Johns Creek. :)
 
irvineboy said:
I am thinking of doing an ARM on a jumbo loan, even though I plan to stay in the house for more than the time of the loan.  30 year fixed on a jumbo are about 4.5% + but a 5/1 ARM is 3.125% and a 7/1 ARM is 3.5%  This makes a huge difference on a loan but in the 6th (or 8th year), they add another 2 pts.  So it can go to 5.125% or 5.5% after the ARM is up.  There is a maximum of 5 pts throughout the life of the loan.  So does that mean in the 7th (or 9th year) they add another 5.125% + 2 pts = 7.125% (5.5% + 2 pts = 7.5%)?  Then another 1 pt in the final year?

Anyone do this vs the 30 year fixed who plan to stay in the house for 10+ years?
Click to expand...

Your rates seem a bit high, 5/1 ARM is around 2.625% with plenty of credit to cover all closing costs.  7/1 ARM around 3.125%.  These are from Zillow, where are you shopping?
 
The rates depend on the structure of the deal. For example, there are lenders still offering 3.125% "Fee Free" on 7/1 ARM's that have 5% first adjustment caps. Some borrowers want a 2% maximum 1st adjustment cap, so those loans from those vendors have different fees.

Same thing with the PenFed ARM - plenty of 2.625% 5/1 ARM's out there at near zero fees to close, but they often have a 2% annual cap, and a 5% maximum. The PenFed ARM has a 2% first adjustment maximum, with the loan fixed at that new rate for another 5 years. The costs for specialized loans like that are often higher than the conventional ARM terms most lenders are selling.

It's important to read the fine print on any of these loans. At first glance a 2.625% ARM with a 2% first adjustment, 5% lifetime cap seems great.... no higher than 7.625%.... right? Not always. Sometimes the lifetime cap is set after the 1st adjustment - 2.625% for 5 years, 4.625% worse case scenario + 5% lifetime cap set, which makes it a 9.625% cap. Still in my mind a good deal, but if a borrower is weighing risk over rate, that 9.625% cap seems like a very high barrier to scale.

Rates and terms depend on what your goals are. If it's low rate and you don't care about adjustment caps, one can get a great rate, but that's because some borrowers may have a higher risk tolerance that others.
 
Ready2Downsize said:
Doesn't the Pen Fed loan have a prepayment penalty if it's refinanced or paid off within the first three years?
Click to expand...
qwerty said:
Ready2Downsize said:
Doesn't the Pen Fed loan have a prepayment penalty if it's refinanced or paid off within the first three years?
Click to expand...

it relates to closing costs:

Reimbursement of Closing Costs: If you pay this loan off and close the account earlier than the 36-month anniversary date of the loan closing, you will be obligated to pay PenFed a prorated amount of the closing cost credit received from PenFed. This amount will be added to any loan payoff amount requested prior to the 36 month anniversary date.  The reimbursement amount will be prorated in equal amounts on a monthly basis. Closing costs credit to be reimbursed include all closing costs paid by PenFed.
Click to expand...
Their closing costs were around $1k....not a big deal.
 
Going through a Penfed refinance right now on the 5/5. Locked it in at 2.675% at zero points.  Could have bought down to 2.50%for .375 points but passed.  Was that a good move?

It took them a couple days to contact me initially but ever since then it has been going pretty smoothly.  Now just waiting for the appraiser to contact me.

Trojan, thank you for your ARM spreadsheets from years ago.  They were very helpful.

A couple interesting things i learned so far that may help others:

1. Everyone gets the same promotional rate if you qualify.  There is no dings if it is a condo vs. SFR or for credit score. You either qualify or you don't.
2.  Was told that the two things they look for to qualify is a credit score over 680 and a back end ratio of 43%.  There is no front end ratio requirement.
 
New Name said:
Locked it in at 2.675% at zero points.  Could have bought down to 2.50%for .375 points but passed.  Was that a good move?
Click to expand...

havent done the math but probably a good move. the payment difference (net of tax benefits) is minimal from 2.675 to 2.50
 
PenFed has awesome rates but I heard they do not do new build.  I know they don't do new build condos but I'm not sure SFR though.
 
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