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Old 10-01-2011, 06:48 AM
 
37 posts, read 108,722 times
Reputation: 25

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Hi,

I am first time home buyer shopping around for a home loan and wondering whether I should go for 10/1 ARM or 15 yr fixed (as I am not planning to stay put more than 10 years (as per my current planning) and the reason for not going for 30yr is expensive and more money is going towards interest. The advantage with 10/1 ARM is we can prepay more money towards principal to build equity and enjoy the lower monthly payments. 15 year fixed has higher monthly rate and will be an overhead paying high bills every month. But I want to build equity by paying more money towards principal when I have money but not every month.

Do u have any recommendation And also looking for a lender with lower rates and closing costs. Thanks.
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Old 10-01-2011, 07:53 AM
 
1,163 posts, read 1,960,216 times
Reputation: 1106
If those are your choices, go for the 15 year mortgage. In my opinion, ARMs are one of the worst financial products in history. The only way I'd even think, for one second, about an ARM is if I knew, for 100% certain, that the property would be worth a minimum of 20% more at the end of the ARM. Since that is pretty much impossible to know, I don't like ARMs.

If you are willing to consider a 30 year mortgage, it may not be a bad idea. I've seen some for only ~0.35% higher than 15 year mortgages. Why would I advise this? Simple: you can always pay over on your mortgage. My wife and I have a 30 year mortgage. On our current pace, it will be paid off in the 12th year. However, the economy still stinks and may be this way for another decade. It's quite possible any of us may have to endure stretches of unemployment. Therefore, it would be nice to have the option of paying the lower monthly payment that a 30 year mortgage offers. I apply the same logic to vehicle purchases. Quite simply: Don't set your budget at the actual payment value. Always set your budget to include monthly overage payments. That way, you have built-in flexibility.

Example (with simple numbers):
30-year Mortgage Payment: $1000
Actual monthly mortgage payment if the household has full-employment: $1500
60 month vehicle payment: $400
Actual monthly mortgage payment if the household has full-employment: $500

Total monthly payments on loans: $2000

And then, uh-oh... someone in the household loses a job! You start making the normal payments to stretch you savings until a new job is found:
Mortgage: $1000
Vehicle: $400.

Total monthlies: $1400.

By choosing longer terms, you've just given yourself $600/month in flexibility. However, if you'd chosen a 15-year mortgage and a 36 month car loan, you don't have near as much flexibility.

It's a sad state of affairs, but this long-lasting economic malaise calls for more defensive strategies.

Good luck!
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Old 10-01-2011, 04:00 PM
 
Location: Mooresville, NC
2,143 posts, read 2,610,964 times
Reputation: 1660
I agree, go any other way aside from the ARM.

There are great 20 and 30 year mortgage rates right now which gives you that lower payment in case anything unfortunate happens but you can also pay more towards principal when times are good.
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