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

NEW -> Contingent Buyer Assistance Program
If this transaction is for new construction, from what I recall PenFed excludes these homes from their ARM products. Strange because you can refinance into a PenFed loan shortly after you close.

ARM's are not for everyone. As long as you can accept a reasonable risk of rate exposure once the ARM adjusts, they can be great loans to consider. Most lenders caps have dropped from 5/2/5 to 2/2/5 so the risk of rates "shooting up"  isn't as probable as older ARM products were at risk of experiencing.
 
If you pay your 5 / 1 ARM at 3.0% at the same payment as a 4.0% 30 fixed, you come out way ahead, even with the tax break. That's how I'd play it.

The MID is under assault now in Congress. Do I think it will be cancelled? No. Could it be reduced for high balance, high net worth borrowers? Perhaps.
 
Soylent Green Is People said:
If you pay your 5 / 1 ARM at 3.0% at the same payment as a 4.0% 30 fixed, you come out way ahead, even with the tax break. That's how I'd play it.

The MID is under assault now in Congress. Do I think it will be cancelled? No. Could it be reduced for high balance, high net worth borrowers? Perhaps.
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Problem is that with these rates, it is highly foreseeable that rates maybe 1 or 2 points higher in 5 years. 

I think the MID will be around for awhile and any changes to the deduction will likely be phased in and existing homeowners/mortgage owners likely be grandfathered in.
 
Agree, see my calcs

Loan                       $750,000   $750,000 $750,000
Interest Rate (5/1) 3                             3
Interest Rate (30 yr fixed)       4
Monthly Payment $3,162   $3,581       $3,581
Balance at 5 years $666,798 $678,356     $639,738

 
I like ARMs.  I can't seem to find my nifty excel model, but if you were to assume the worst about rates and calculate how much money you would have in your pocket when you sell the place or pay it off, you may be surprised at the result.

The lower principal balance at the reset and lower interest paid during the ARM can compensate for a while for the rate being at its worst after the reset.  If you took each ARM and compared it to the 30 year fixed, there is a break even point for when selling the property will lead to the same total cash out of your pocket. 

 
lovinLife said:
I like ARMs.  I can't seem to find my nifty excel model, but if you were to assume the worst about rates and calculate how much money you would have in your pocket when you sell the place or pay it off, you may be surprised at the result.

The lower principal balance at the reset and lower interest paid during the ARM can compensate for a while for the rate being at its worst after the reset.  If you took each ARM and compared it to the 30 year fixed, there is a break even point for when selling the property will lead to the same total cash out of your pocket. 
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I did an analysis in a spreadsheet for a few clients years ago.  Here's the spreadsheet....breakeven assuming worst case scenario for a 7-year ARM is about 10 years.
 

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Irvine Dream said:
Agree, see my calcs

Loan                       $750,000   $750,000 $750,000
Interest Rate (5/1) 3                             3
Interest Rate (30 yr fixed)       4
Monthly Payment $3,162   $3,581       $3,581
Balance at 5 years $666,798 $678,356     $639,738
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That's probably the biggest benefit of a lower rate ARM...the balance at the end of the ARM term is considerably lower than on a 30-year fixed loan.  When you apply time value of money, the difference between an ARM and 30-year fixed loan become even greater.  Buyer think that they'll own the house that they bought forever but the reality is that the majority of people will sell their homes within 7-10 years for various reasons so I don't see any real downside in opting for an ARM loan.
 
I must be a 99%er.... $220 a month is a significant amount to me... even on a $1m house.

That's over $2500 a year, that's 2 big screens or iPhones for the whole family.
 
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%.
 
OpenSky said:
paperboyNC said:
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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Yup. I could afford by home with a 30yr fixed but the savings with an ARM was huge and the break even point is 13 years. We don't plan to stay in this home for 13 years so it should be guaranteed savings.
 
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