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Hello,
I am currently in housing contract for a condo and a first time buyer.
I think it is highly likely that I might sell off the condo in 5-6 years, and so 5/1 ARM seemed appealing. Loan officer offered 3.625% rate with 575 dollar points as discount points. margin 2.25% and 2% increase every year after 5 years.
The 15yr loan he offered was at 4% rate with no discount points. The condo price is 385k.
There is a chance that I might still retain the condo after 5-6 years.
While making calculations it seems like after a 5 year period, the balance I owe the bank is similar in both cases (based on amount i paid and amortization) if I keep making the minimum payments over 5 years.
In that case, is it better to go with 15 yr loan to be on the safe side? I am a new home buyer and it all seems confusing .
Thanks!
You do realize that the reason that the lender is willing to discount the 5/1 arm is that there is a strong likelihood that rates will be higher and your mortgage will adjust to those new higher rates after the 5th year...
At kind of the other end of mortgage options a 15 yr fixed loan is geared toward folks who desire to pay off their loan in a period less than the traditional 30 yr term, often because they do not want the ongoing mortgage costs to extend past a particular life landmark...
Key to either of these decisions is your personal financial picture and ability to utilize cash that is not going toward mortgage in investment that likely will grow faster than any change in value of the condo you are purchasing.
There are many online calculators that will allow you to use various interest rates to understand what might happen as the rate increases, I would also suggest that you need to have a grasp of likely moves in your own income, the potential shifts in the value of you condo, various scenarios to profitably rent out the unit, as well as what happens if you have more "equity" in a property that may not really be worth as you hoped...
What are the rates and fees for a 7 year ARM or a 10 year ARM?
I think this is your answer, but only if you are confident about your time-lines. You can pick up a 7/1 for 3.875% up to 1.5M or a 10/1 (also up to 1.5M) @ 4.125% no points, no add on for condo.
If you put down 20% your mortgage balance would be $308,000. Your monthly payment for the 5/1 @ 3.625% would be $1,404.64 and $2,278.24 for the 15 year at 4%, principle and interest.
That's a $873.60 difference.
If you took that $873.60 each month, set it aside, and invested it over 5 years, earned 6% compounded monthly you would have $60,951.10.
Or just get a 30 year mortgage, split the difference and put an extra $400 towards principle, and invest the rest. If a life altering event happens you can scale back your prepayment, or if your income increases you can always add more towards the principle.
I have no idea what your financial/job situation is like.
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