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Old 10-23-2013, 10:16 AM
 
737 posts, read 1,516,012 times
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The scenario: I get an 5/1 ARM with a low rate and therefore a lower payment. Since the payment is lower, I am able to put extra money towards the principal of the home each month, and after 5 years I will have been able to put maybe around $25,000 extra into the principal. At that point I can see how much my payment jumps up (if it doesn't jump by much I can continue this process), or if the payment increases too much I refinance into a fixed rate.

What am I missing about this scenario, would this work? It seems like this would be an easy way to get more money into the principal, but also leave me with a cushion just in case something happens to me financially that I technically do have a lower payment for 5 years.
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Old 10-23-2013, 10:59 AM
 
3,325 posts, read 7,290,404 times
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ARMs are great for sophisticated, disciplined buyers with reserves.

Prepare for the worst: Economic Recovery brings fixed rates in the 6s/7s by the time you want to refinance. Nearby homes fall into foreclosure, reducing your value to the point that you cannot refinance, and HARP expires. You lose your job, or someone close to you becomes sick or dies.

Fixed rates aren't that far from ARM rates. If you are buying the home to live in it for at least ten years, I'd just get a fixed rate and accelerate those payments, and not try to outsmart the system.
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Old 10-23-2013, 11:19 AM
 
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What could go wrong? Life happens.

Unless you can pay it off in 5 years, don't do an ARM. Not in this climate.

Not to mention rates are lower than they have been in 50 years. Which way do you think an ARM will adjust? It will go up!
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Old 10-23-2013, 11:30 AM
 
3,313 posts, read 4,114,041 times
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Quote:
Originally Posted by CristenS View Post
The scenario: I get an 5/1 ARM with a low rate and therefore a lower payment. Since the payment is lower, I am able to put extra money towards the principal of the home each month, and after 5 years I will have been able to put maybe around $25,000 extra into the principal. At that point I can see how much my payment jumps up (if it doesn't jump by much I can continue this process), or if the payment increases too much I refinance into a fixed rate.

What am I missing about this scenario, would this work? It seems like this would be an easy way to get more money into the principal, but also leave me with a cushion just in case something happens to me financially that I technically do have a lower payment for 5 years.
What mortgage amount are we talking about?
5/1 ARM vs 30/20/15 Fixed?
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Old 10-23-2013, 12:06 PM
 
Location: Southern California
4,350 posts, read 4,963,666 times
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If you have a lot of equity, I think ARMs are okay, or able to pay down a lot when you want to refinance.
Was this a HARP loan?

Down side to an ARM - With today's regulation , it would be hard to refinance out of the arm into a fixed rate loan at a higher rate in the first 5 years. When I say hard, you'll have to pay down extra principal to make it work. Lets say two years from now you saved $12,500, rates are going up and values are going down and you want to lock in a fixed rate loan since you expect rates to go up in 3 years, you can't simply refinance into a higher rate unless you can bring down your new mortgage payment a certain amount. Hopefully with that $12,000 you can pay down enough of the loan and pay enough fees to make it work. You might just sell it because it may be too difficult to refinance, then just buy another home at a fixed rate.

Is this harp or did someone actually qualify you for the 5 / 1 arm.

I like the 7/1 jumbo over the 5/1 , but that is just personal preference. Initial increase limit is also something to consider. A 2/2/5 offers more protection than a 5/2/5 but might cost more.

There is some belief that before interest rates can go up, the economy must improve and people must be spending more money. If a bunch of other people start making more more from $12 to $14 an hour and 200,000 jobs are create it might not directly increase your income, rates might go up, but you may not be benefiting because your boss didn't give you a raise. You will be hit with higher rates without higher income which would be bad. By the sounds of it, you said you'd be paying $5,000 a year to fix your payment from years 6 to year 30. Insurance is a personal choice, and we've all heard the horror stories of people without good insurance. If you don't want stories to be told about you, you better have a plan.

Last edited by thelopez2; 10-23-2013 at 12:14 PM..
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Old 10-23-2013, 12:18 PM
 
Location: Southern California
4,350 posts, read 4,963,666 times
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Quote:
Originally Posted by EngGirl View Post
What mortgage amount are we talking about?
5/1 ARM vs 30/20/15 Fixed?
I'm curious how does it make a difference when comparing the 30/20/15 fixed if the rate of the 5/1 ARM is stated as a lower rate?
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Old 10-23-2013, 01:34 PM
 
1,263 posts, read 2,656,438 times
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Quote:
Originally Posted by Pfhtex View Post
ARMs are great for sophisticated, disciplined buyers with reserves.

Prepare for the worst: Economic Recovery brings fixed rates in the 6s/7s by the time you want to refinance. Nearby homes fall into foreclosure, reducing your value to the point that you cannot refinance, and HARP expires. You lose your job, or someone close to you becomes sick or dies.

Fixed rates aren't that far from ARM rates. If you are buying the home to live in it for at least ten years, I'd just get a fixed rate and accelerate those payments, and not try to outsmart the system.
Yes, savvy investors with lots of dough in the market often like ARMs because they're hedging [blah blah blah]. I don't understand all the investment side stuff, but I've seen a lot of asset-heavy people choose ARMs with great confidence.

My first mortgage was a 1/1 ARM in a falling interest rate environment. The rate dropped every year like a free, no-effort refinance!

But we're probably going up from here, so I'd get a fixed rate. ARM rates aren't that much lower than fixed, so don't get a 5/1 unless you're sure you'll sell within 6 or 7 years.
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Old 10-23-2013, 01:49 PM
 
3,313 posts, read 4,114,041 times
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Quote:
Originally Posted by thelopez2 View Post
I'm curious how does it make a difference when comparing the 30/20/15 fixed if the rate of the 5/1 ARM is stated as a lower rate?
This is what I am trying to figure out - what numbers OP used to come up with this calculations and savings towards principle ($25K within 5 years).
I played with some numbers and don't see any significant difference in savings between 5/1 arm and 30 year fixed for example. If OP has extra $$ to pay towards principle each month on top of regular payment for lets say 30 year fix, it makes more sense.
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Old 10-23-2013, 01:58 PM
 
3,442 posts, read 4,492,291 times
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In 1978 I had 2 choices to finance my farm

8.5% through local bank
8.25% through Federal Land Bank

Since interest rates were stagnant, I went with the variable as I liked Federal Land Bank.

I soon was paying 13.5% when interest rates spiked and despite paying 50% down, I could not get a bank loan to re-finance as land values had dropped.

I barely was able to hang on and times were tough.
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Old 10-23-2013, 02:48 PM
 
4,490 posts, read 7,979,912 times
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Quote:
Originally Posted by Teddy52 View Post
I barely was able to hang on and times were tough.
People have short memories and don't learn from other people's mistakes. Thanks for the story.
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