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I have never heard of a 1/1 ARM before, but my bank started offering this product recently. It's offered at 2.5% capped at 2% increase per year with a maximum cap of 5% over the course of the loan. My reading from the most recent Fed meeting was the economy is still too fragile to be mucking with interest rates, and that rates for the next two years, at least, are likely to remain low. Also, given that my bank is a small, conservative bank, I tend to think they wouldn't be offering such a product if they felt differently about interest rates.
This 1/1 ARM product seems tempting given these circumstances. Any thoughts on this, good or bad?
So, you are looking at 12 months of 2.5% followed by 4.5% and an upper limit of 6.5%.
You have to ponder if the one year discount justifies the risk down the road. I don't see it as very attractive, but someone drilled my crystal ball out to be a bowling ball.....
So, you are looking at 12 months of 2.5% followed by 4.5% and an upper limit of 6.5%.
My understanding that it would be 12 months of 2.5%, followed by 12 months of whatever the adjustable rate is at the time, but no more than 4.5%, with an upper limit of 7.5% for the lifetime of the loan.
My understanding that it would be 12 months of 2.5%, followed by 12 months of whatever the adjustable rate is at the time, but no more than 4.5%, with an upper limit of 7.5% for the lifetime of the loan.
Whoops. My bad. Yes, an upside risk to 7.5%.
What rate are you quoted if you go fixed rate?
Also, are you able to convert the loan to fixed at a current rate, say in 3-5 years?
My understanding that it would be 12 months of 2.5%, followed by 12 months of whatever the adjustable rate is at the time, but no more than 4.5%, with an upper limit of 7.5% for the lifetime of the loan.
Whats the purpose of going 2.5% for 12 months, 4.5% for another 12 months and then 7.5% when you can get a fixed for under 4%? I dont see how anyone takes these ARMs if they accept that fact that rates will go up.
Whats the purpose of going 2.5% for 12 months, 4.5% for another 12 months and then 7.5% when you can get a fixed for under 4%? I dont see how anyone takes these ARMs if they accept that fact that rates will go up.
Why are you so sure the rate will be 4.5% after 12 months? It might remain at 2.5% mark. Topic starter just said it cannot be higher than 4.5% after 12 months, and never higher than 7.5%.
There are many reasons why people prefer adj rates...
Whoops. My bad. Yes, an upside risk to 7.5%.
What rate are you quoted if you go fixed rate?
Also, are you able to convert the loan to fixed at a current rate, say in 3-5 years?
Interestingly, my bank is no longer offering a 30 year fixed . . . loan officer said they filled their quota for the year already (never heard of such a thing personally). 30 year fixed rates seem to be hovering around 4.75.
Yes, you can refi and convert to a fixed rate at any time.
To say it is good or bad is relative to what are your other options, 3 5 7 ARM. You can think of a HELOC as a Monthly ARM.
To oversimplify and if you are a gambler , if you borrow at 2.5% and the property appreciates at 2.5% you are break even. If you borrow at 4.5% and the property appreciates at 2.5% you just lost 2%. I do understand that you need a place to live anyways, like I said it is oversimplified. Can you afford to pay a 7.5% interest.
This is just theory but rates can be consider artificially low. Rates should go up when the economy improves , improvement will be in the form of people making and spending more. If rates do go up, you income should be going up, and rents should be going up, but because I they are artificially low, rates will go up without pay and spending increasing in a significant manner.
Also If the rates do go up, are you ABLE to make a large payment to make the monthly payment manageable or would you be willing to sell?
There are causes where I'd do ARM, but if ARM and fixed are so close together I'd take the fixed.
I'd say ARMs are bad for MOST people, especially when they can only make the payment based on the minimum qualification.
To say it is good or bad is relative to what are your other options, 3 5 7 ARM. You can think of a HELOC as a Monthly ARM.
To oversimplify and if you are a gambler , if you borrow at 2.5% and the property appreciates at 2.5% you are break even. If you borrow at 4.5% and the property appreciates at 2.5% you just lost 2%. I do understand that you need a place to live anyways, like I said it is oversimplified. Can you afford to pay a 7.5% interest.
This is just theory but rates can be consider artificially low. Rates should go up when the economy improves , improvement will be in the form of people making and spending more. If rates do go up, you income should be going up, and rents should be going up, but because I they are artificially low, rates will go up without pay and spending increasing in a significant manner.
Also If the rates do go up, are you ABLE to make a large payment to make the monthly payment manageable or would you be willing to sell?
There are causes where I'd do ARM, but if ARM and fixed are so close together I'd take the fixed.
I'd say ARMs are bad for MOST people, especially when they can only make the payment based on the minimum qualification.
Thanks for the info. The available rates look like something this:
1/1 ARM: 2.75
5/1 ARM: 3.75
30/yr Fixed: 4.75
Since I don't plan to be there more than five years, I'm considering the ARMs over the fixed rates; it just makes more sense. The 5/1 ARM is probably the safe bet, but then if rates stay low, however artificially, for a few years, which I think they probably will, the risk on a 1/1 may pay off. I'd also like the issue settled about who the next Fed chair will be. The worst possible candidate in my scenario, Larry Summers, has already been ruled out, thankfully.
You can get a 5/5 ARM for 2.75% with 5 years adjustment cap of 2% and lifetime max 7.75% with Penfed
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