Profile picture for sanjayd

ARM Vs Fixed

I am looking to buy a home and live in it for 7-9 yrs. Is it good to lock in at current low interest rates and go for fixed loan or take up the risk and go for a ARM loan?
Please advise.
  • December 20 2011 - Edison
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Answers (6)

If you know you'll be moving in less then 9 years then I would go with an ARM. If you're saving 1% of interest for 7 years then you'll have to calculate the savings for 7 years and compare that against a worst case scenario. If it's a 2/5/2 ARM then the highest it will raise is 2% in the first/7th year and 5% over the life of the loan.

Let's say you can lock into a 7 year ARM at 3.0% vs a 30 fixed at 4.0% on a 200K loan amount. The savings is $112 a month, $1,344 a year, $9,408 over 7 years.

That's a nice amount of savings per month. You can take a trip once a year with the amount you'll be saving each year. I would be happy to help you with your financing!

  • December 21 2011
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Sanjay;

Going with a 7yr ARM is not that bad of an idea.  You could probably save almost a full percent over a 30yr fixed.  That is some significant savings over the span of 7 years.  Plus should your rate go up a little bit the hit on your pocket book will not be as bad as you think b/c the payment is based on the unpaid balance at the time of adjustment.  In the end everyone has their own personal trigger points so there is not one right answer.  Would be happy to help.  Contact me through my profile.
  • December 20 2011
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"Many others already did that and the resulting foreclosure mess is obviously a huge problem."

That is simply a myth. Conventional, conforming, adjustable rate mortgages have nothing to do with the wave of foreclosures. Those who took out ARMS in the last 10 years have seen indexes decrease resulting in lower adjustments or none at all. The cause of foreclosures is economic turmoil including hardship, job loss, etc, loss off property value, option ARMs where negative amortization occurs and interest rates recast, interest only mortgages that turn to fully amortized increasing the payment, and borrowers who feel they are entitled to equity simply walking away. I have not seen one single foreclosure as a direct result of a conforming ARM reset.

This is not to say that taking an ARM now will yield the same results since rates seem to be at the bottom, it's just an observation that many people incorrectly blame ARMS for the financial mess, and it's just not true.
  • December 20 2011
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sanjard- I do not originate loans in NJ. I wanted to clarify that not all ARMS are bad for all borrowers. You may have read negative remarks about ARMs, but that is not necessarily the case. The borrower should be well advised of the products risks and rewards and the intelligence to understand the difference. 

I recently originated and funded an ARM for a college administrator. She received a 7/1 interest only ARM @ 3.875% on a $2M+ loan, that  provides the option to convert to a FRM, at no charge, from the 1st through 5th adjustment period, at Fannie Mae Mandatory 60 Day Rate + 1%. Today that would equate to about 4.875%.

The FRM is then amortized over 30-years from the initial 40-year I/O loan. Rates on this product are the same up to $4,000,000. If you would like to learn more of this program, I have a page devoted to it on my website, in Chapter Four "Arm Conversion Loan." Best wishes.

Happy holidays, Rudi
  • December 20 2011
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Profile picture for the_country_hick
Why take the risk of being in that house when the arm adjusts higher? Many others already did that and the resulting foreclosure mess is obviously a huge problem.

Get a fixed rate and be safe.
  • December 20 2011
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Profile picture for daveskow
unless you are 100% sure when you plan to move/ sell ...I would say :

go with fixed rate loan and pay it off as fast as you can.....
  • December 20 2011
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