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They seem potentially risky since rates could go up-and-up-and-up. However, is there any reason they can't be refinanced to a traditional 15 or 30 year loan before the five years is up? If not, why not do an ARM since the payment is lower than a 15 or 30-year mortgage (at least from what I see playing around on calculators), pay the extra savings (savings as in the difference between paying the ARM rate rather than the 15/30 rate) against the principal, and then re-finance into a regular 15/20/30/whatever mortgage before the 5 years is up?
They seem potentially risky since rates could go up-and-up-and-up. However, is there any reason they can't be refinanced to a traditional 15 or 30 year loan before the five years is up? If not, why not do an ARM since the payment is lower than a 15 or 30-year mortgage (at least from what I see playing around on calculators), pay the extra savings (savings as in the difference between paying the ARM rate rather than the 15/30 rate) against the principal, and then re-finance into a regular 15/20/30/whatever mortgage before the 5 years is up?
Because you have not gotten rid of interest rate risk. Suppose rates go up. What do you suppose happens when you look to get a loan for the refi? That's right, you'll have to deal with whatever rates they offer at that time.
If the adjustment on the ARM would be a higher rate, this likely also means that the loans that will then be available for the refi will also have higher rates.
There is no free lunch.
The time to get a 5/1 ARM is when you're going to sell the house within 5-6 years or pay it down really fast. For example, if you can pay so much each month (comfortably, with 6 month emergency reserve fund) that by the time the first adjustment hits you will have paid off 50-60% of the original amount (or more), then go ahead and do the ARM. Otherwise with long-term rates so low why chance it?
Because you have not gotten rid of interest rate risk. Suppose rates go up. What do you suppose happens when you look to get a loan for the refi? That's right, you'll have to deal with whatever rates they offer at that time.
If the adjustment on the ARM would be a higher rate, this likely also means that the loans that will then be available for the refi will also have higher rates.
There is no free lunch.
The time to get a 5/1 ARM is when you're going to sell the house within 5-6 years or pay it down really fast. For example, if you can pay so much each month (comfortably, with 6 month emergency reserve fund) that by the time the first adjustment hits you will have paid off 50-60% of the original amount, then go ahead and do the ARM. Otherwise with long-term rates so low why chance it?
That is really obvious and I feel stupid to have not thought about that, haha. I guess better to look foolish here than waste money in real life!
Don't forget that it can cost several thousand dollars to refinance, so the cost savings of the ARM to then refi later needs to make sense, and for most people, it doesn't.
I do like that the 5/5 caps itself at a no more than 5% increase for the life of the loan. Can someone still buy points (I think that is the term) on an ARM, or only on traditional mortgages?
Because you have not gotten rid of interest rate risk. Suppose rates go up. What do you suppose happens when you look to get a loan for the refi? That's right, you'll have to deal with whatever rates they offer at that time.
If the adjustment on the ARM would be a higher rate, this likely also means that the loans that will then be available for the refi will also have higher rates.
There is no free lunch.
The time to get a 5/1 ARM is when you're going to sell the house within 5-6 years or pay it down really fast. For example, if you can pay so much each month (comfortably, with 6 month emergency reserve fund) that by the time the first adjustment hits you will have paid off 50-60% of the original amount (or more), then go ahead and do the ARM. Otherwise with long-term rates so low why chance it?
The first home we bought in 2001 was a 5/1 ARM. We knew for certain we would only live there for 5 years, which was exactly what happened. So, sometimes, it is ideal. There are any number of reasons someone might have good cause to think they are only going to own a home for 3-5 years. Maybe they are military. In our case, we lived in a community where my husband was doing medical training and knew that we would either be gone after that time, or remain, but buy a bigger home.
It IS possible for the value of your house to go down, so if you put very little down at the beginning, in 5 years you may not be able to refi without bringing money to the table.
IMO, it's only smart to get an adjustable rate when, as mentioned above you plan to sell prior to the first adjustment, or when interest rates are so sky high that it's highly likely they will be lower when it's time to adjust.
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