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Is a 5/1 adjustable a good option for us?

We fell behind on our mortgage a few years ago when we accidentally ended up owners of 3 homes, and have been steadily bringing our credit rate up.  Right now it is just under 700.  I think it might make sense to get a short-term adjustable, since we will want to refinance when our rate gets 760 anyway.  Given the cap, and the fact that we are spending well below our ability, we would not have trouble paying at the highest rate it could adjust to anyway.

Is this logic flawed?
  • August 16 2013 - Bainbridge Island
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Answers (8)

Profile picture for daveskow
9/26/2013

Checking in to see how the efforts with the refinance at scores under  700 is progressing ? 

Were you able to get approved and  if so - what  loan program are you proceeding with ?

Thanks
  • September 26 2013
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Your logic is not flawed, but I would add something for your consideration.  You mention that you'd like to refinance when your credit improves.  Is it your intention to refinance into a 30 year fixed at that time?  Do you think you'll be keeping this house for the long term?  You mention that you want to refinance when your credit gets to 760.  How long will that take?  By the time your credit improves rates may have gone up.  Rates today for a credit score of under 700 may be tomorrow's rates for a credit score of 760.

That being said, a 5/1 arm (fixed for 5 years, then converts to adjustable) is not a bad option.  If your goal is to keep your house for the long term, you might want to take advantage of the low rates of a 5/1 arm, and make extra principal payments during the five years.  When the loan adjusts, you will have more equity and a lower loan amount than you would have had with a 30yr fixed at a higher rate.  At that time you might want to refinance into a 15 yr fixed. 

Just something to think about.  Hope it helps.
  • August 19 2013
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Depending on your loan size, the ARM can save you a substantial amount of interest. When you calculate the savings over the 5 years, factor in the time value of $,  and then subtract the rate adjustments increase in interest paid as a worst case, you will usually just about break even over a ten year period. If you sell the home or get out the note after the five years, you will almost always come out ahead.

Since most people do not stay in a mortgage more than 5 years, it is a myth that ARMs are risky for everyone. Granted, if you are on a low fixed income or not established in your carreer living paycheck to paycheck, an ARM is not for you.


All The Best
  • August 19 2013
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To me to bigger issue is how long you expect to stay in the home. If it is 5-7 years, I would go for the ARM. If longer, go for the fixed. Interest rates are doing some crazy things right now and you never know if these rates are going to be around too much longer anyway.
  • August 19 2013
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Profile picture for CA Direct Lending
Your logic is not flawed.  It sounds like you're just trying to find the most affordable option while you improve your credit score.

If you can afford the payment and you intend to keep or eventually pay off your home, I recommend refinancing at a 30-year fixed rate now just in case interest rates are higher when you do get your score to a 760 or better. 
  • August 19 2013
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ARM's are always extremely risky as you never really know where the rate will be! That being said if you are only looking for a short term solution you could go with an ARM but if a fixed rate is similar in price I would go for the fixed as you don't have to worry about what you will be paying in the future as your payments wont change for a fixed rate mortgage. 
  • August 19 2013
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Profile picture for daveskow
I would go with a fixed rate as  you have  absolutely zero idea as to  1) when scores will improve and  2) what rates will be in the future

if fixed option is high now ....you can consider  refinancing it once the scores improve  ( depending on rates )

if you plan to sell the home before rate/ payment adjusts - then arm is good idea




  • August 16 2013
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Profile picture for Brian GFL Capital
not flawed if you plan to keep the loan temporarily as a "band aid" loan until your credit increases.

if the payment isnt much different you may want to look at a fixed rate just in case rates rise over the next few years you have a safety net and wont feel forced into refinancing when the 5 year fixed period is over.
  • August 16 2013
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