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Old 12-24-2013, 11:19 AM
 
Location: In the city
1,581 posts, read 3,432,149 times
Reputation: 2358

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I have my commitment letter and am getting ready to close on my property. I was talking to my lender the other day and I asked a few questions about ARMs. I had never really considered them before, but a 10 or 7 yr ARM may make sense for my situation. I am not sure how long I will stay in my property, but doubt I will be there beyond ten years. My fixed rate payments are easily do-able, but can anyone speak from experience about an adjustable rate mortgage? Are they worth it? My interest rate is 4.375% on the fixed rate.
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Old 12-24-2013, 11:42 AM
 
Location: Southern California
4,453 posts, read 5,752,759 times
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If you can manage your money an ARM can be good. You also have to consider the rate and the function. If the 10 year arm is close to the same rate as the 30 year fixed, there is little reason to take the ARM. ARM got a bad rap because people were buying homes with a low payment getting a large home with no equity and couldn't even afford the fixed rate payment. For conventional, you'll need a good down payment, to still get an ARM, it will protect the lender when prices fall. The first person to lose money when prices fall is the borrower, they lose the down payment first. When borrower didn't have to put a down payment, they had nothing to lose, they let the bank take all of the loss.

At one point earlier this year , the rate different between an ARM and Fixed 30 was like 3% versus 3.3% , now it might be 3% versus 4.25%. Using simple math and not actual payments, you can see, 5 years, the first case you'd only save 1.5% in 5 years versus over 6% in the second case.

A fixed 30 has a lot of speculation on the lender side, the ARM has a lot of speculation on the borrower side.

I've used ARM when I was moving a lot for rental properties when rates were going down. As rates are going up, If I wanted to keep property long term , I'd do a fixed.

Unlike an owner occupied property , an investment property is easier to sell because I don't need to find a place to move.
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Old 12-24-2013, 11:56 AM
 
Location: In the city
1,581 posts, read 3,432,149 times
Reputation: 2358
Quote:
Originally Posted by thelopez2 View Post
If you can manage your money an ARM can be good. You also have to consider the rate and the function. If the 10 year arm is close to the same rate as the 30 year fixed, there is little reason to take the ARM. ARM got a bad rap because people were buying homes with a low payment getting a large home with no equity and couldn't even afford the fixed rate payment. For conventional, you'll need a good down payment, to still get an ARM, it will protect the lender when prices fall. The first person to lose money when prices fall is the borrower, they lose the down payment first. When borrower didn't have to put a down payment, they had nothing to lose, they let the bank take all of the loss.

At one point earlier this year , the rate different between an ARM and Fixed 30 was like 3% versus 3.3% , now it might be 3% versus 4.25%. Using simple math and not actual payments, you can see, 5 years, the first case you'd only save 1.5% in 5 years versus over 6% in the second case.

A fixed 30 has a lot of speculation on the lender side, the ARM has a lot of speculation on the borrower side.

I've used ARM when I was moving a lot for rental properties when rates were going down. As rates are going up, If I wanted to keep property long term , I'd do a fixed.

Unlike an owner occupied property , an investment property is easier to sell because I don't need to find a place to move.

I am putting 20% down, so that is why I went with a fixed rate, conventional loan. But now I am thinking the 7 yr ARM may work. The 10 yr is too close to my fixed rate payments, so you are right, it doesn't make a lot of sense.
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Old 12-24-2013, 12:33 PM
 
Location: Southern California
4,453 posts, read 5,752,759 times
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There is an initial interest rate increase , There is an 3 numbers , initial rate increase max , each adjustment cap, maximum cap. If you had 5/2/6. The fist number is the maximum initial increase, if you start at 3% , 8% would be your maximum fist year, if you can't afford a 8% rate, you'll be in trouble. Sometimes the 5 year might have a 2/2/5, so if you start at 2.875, on year 6, it might be 4.875%, year 7 6.875%, you can see how quickly your saving could disappear by year 8 or 9 your savings could have vanished, so you really need to stay on top of it.

But imagine paying off a 2.875% loan with the payment of 4.375. You'd be paying off your home so much quicker, your home price would have to drop so much more before you are underwater, you put your self in a better position to refinance. That is why I said it is good if you can manage your money.
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Old 12-24-2013, 12:34 PM
 
Location: In the city
1,581 posts, read 3,432,149 times
Reputation: 2358
Quote:
Originally Posted by thelopez2 View Post
There is an initial interest rate increase , There is an 3 numbers , initial rate increase max , each adjustment cap, maximum cap. If you had 5/2/6. The fist number is the maximum initial increase, if you start at 3% , 8% would be your maximum fist year, if you can't afford a 8% rate, you'll be in trouble. Sometimes the 5 year might have a 2/2/5, so if you start at 2.875, on year 6, it might be 4.875%, year 7 6.875%, you can see how quickly your saving could disappear by year 8 or 9 your savings could have vanished, so you really need to stay on top of it.

But imagine paying off a 2.875% loan with the payment of 4.375. You'd be paying off your home so much quicker, your home price would have to drop so much more before you are underwater, you put your self in a better position to refinance. That is why I said it is good if you can manage your money.

This makes sense. I think I have to crunch some numbers. Thanks!
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Old 12-26-2013, 01:37 PM
 
505 posts, read 684,382 times
Reputation: 512
An ARM can make sense if you will not be keeping the mortgage longer than the period of the ARM, and the interest rate is lower than what you would have gotten with a fixed rate.

With an ARM you are taking the risk that the interest rate will rise in the future after the initial fixed period is over. You have to weigh this against the savings during the initial fixed period.
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Old 01-03-2014, 02:00 PM
 
Location: Coon Rapids, MN
31 posts, read 67,315 times
Reputation: 14
I did a 7 year Balloon (extendable loan) in 2003. I said i will not be in the property in 2010.

I am still in the property! Whoopsies!

I endedup exercising my extendable option which i was at 4.25% from 2003-2010 and then 5.25% for the next 23 years after that.
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Old 01-06-2014, 11:31 AM
 
Location: Annandale, VA
5,094 posts, read 4,560,758 times
Reputation: 4213
Quote:
Originally Posted by LeaveyouAloan View Post
I did a 7 year Balloon (extendable loan) in 2003. I said i will not be in the property in 2010.

I am still in the property! Whoopsies!

I endedup exercising my extendable option which i was at 4.25% from 2003-2010 and then 5.25% for the next 23 years after that.

Why did you not just refinance at 3.25% fixed for 30 years when you knew you were staying?
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