Profile picture for jfBruin

Thoughts on 10/1 ARM?

I'm looking at a 120 day lock on a 10/1 jumbo ARM at 3.75%, no fees but a $5,000 deposit refundable at closing, with a one-time float down within 60 days of closing.  30 year jumbo fixed is 4.25%, but .25% non-refundable fee for the 120 day lock with one free float down w/in 60 days.  We are putting 20% down.

We plan on staying in the home for 7-10 years.  Perhaps longer, but in a perfect world we will be in a position to move to our dream house before we are there for 10 years.  Hence going with a 10/1 (or possibly a 7/1). I figure worst case we are there for more than ten years, refi into another ARM (perhaps 3/1 or 5/1 if we still hope to move), but with a higher rate and lower principal balance. With any luck, our payment would not be much higher with the shorter ARM term and lower prinicipal balance.

Any general thoughts/crystal ball prognostications that can help me decide on the 7/1, 10/1 or 30 year fixed?  Thanks!
  • April 30 - Irvine
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Answers (9)

Profile picture for jfBruin
No fees to lock the 7/1 or 10/1 ARMs.  Quarter point to lock the 30 year fixed.  This is for a new construction home with an insitutional lender.

The 7/1 is at 3.375%.  So 3/8 spread b/w the 7/1 and 10/1, and 1/2 spread b/w the 10/1 and 30 fixed.  So to those that say the spread between the 10/1 and 30 fixed isn't worth it, I disagree.  On a $645k jumbo that is $265+/mo.  The additional 3/8 between the 7/1 and 10/1 is tempting as well.  I doubt I will be there in 10 years, so I'd rather save the $30k+ over the 10 years and risk having to refi then.  50/50 I will be there in 7.

Note that the 120 day lock product includes a one-time float down within 60 days, with no fees.  I would still get the benefit of lower rates within 60 days of close, although I would be surprised if rates are lower this summer than they are now.

Thanks all.  I'm probably going to go with the 10/1, but I will consider the 7/1 based on the spreads in the next weeks when I'm ready to lock (i.e., if there is a huge spread, like 3/4, then I'll take the extra timing risk -- if only 3/8, I'll go with the 10).
  • April 30
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I am very curious of whom the bank is that is offering you this specific quote, as the terms are almost identical to that of the terms of a portfolio lender we work with on a fairly regular basis. If you could identify the bank I could help better answer this question. If it is the bank I am thinking of then I would strongly recommend holding off on locking in until you are within 60-90 days of closing. At this point I do not believe it is necessary to pay a premium to lock in a rate for 120 days. Outside of the standard week to week movement of rates, overall the market has been stable for the last 60 days. ARMs in particular have seen little to no movement. And if this quote is from the bank I think it is from then I would say there is very little risk of movement on any of their ARM products as they have not adjusted them in over seven months. I would request for your loan originator to let you know at what lock duration can you lock without paying a premium. If it is the bank I think it is then the answer should be 90 days which would mean all you have to do is wait 30 days to lock in during a fairly stable rate environment. 



As for your decision on the loan program, I realize this is going to be unpopular with some of the other contributors but if you were to tell me confidentially that you would be out of this home somewhere between 7-10 years, I'm not entirely sure why you would not look into a 10 year ARM, on a loan of this size the payment difference between the 30 year and the 10 year ARM is going to be roughly $150/month if you sell in nine years that would have been a $16k difference in interest payments. In my experience when someone tells me they are going to be out of the house in 7-10 years, it is more likely you will be out of the house in 6-8 years. It all comes down to your long term objectives.  



Please feel free to email me directly with whom the lender is that you are working with.

  • April 30
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Brookstone's advice is best. You need to evaluate the consequences of risk. The 10/1 makes no sense in terms of a rate break. Do a 7/1 or a 30 year..
  • April 30
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Profile picture for CA Direct Lending
Unless this home could become a viable rental when you move in 7-10, years, there is no reason whatsoever to choose the higher-rate, 30-year fixed.

If you think you'll be in the home closer to 10 years than 7, I would consider the 10/1 ARM just to be safe.  Right now, if your ARM were to adjust and you have the typical caps, your rate would adjust to 3.125%.

In 7 years, who knows where LIBOR will be.  At 3.75% on your current 10/1 ARM offer, LIBOR only has to increase another 3/4 of a percent and your new, adjusted ARM rate will be higher than you have now after it's first adjustment.

Forget the 30 and 7.  The 10/1 appears to be the best choice for the scenario you described. 
  • April 30
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I would advise against paying for a long term lock, generally a waste of money.
Is this new construction and thus your reasoning for the 120 days?

The difference in rate between 10 year and 30 year is small in the big picture.

The reason to choose 7 year ARM is that you want a lower payment and plan to
sell in 5 or 6 years, same thing with a 10 year. Generally if you are under 48 years
old you will sell in 5 years.

I advise a no points loan 30 year loan over your plan. If rates ever fall, you
have no skin in the game. This allows you to know where you stand. It forces
some pay down on the principle and if you are transferred by job you could
sell.
Irvine market is active and increasing slowly. Best of fortune in your plans!
  • April 30
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Profile picture for Brookstone Mortgage
Personally, I believe 10/1 ARM's are a waste of time. The pricing is not attractive enough to sway one from a 30 year fixed given the risk. A 7/1 however offers a significant pricing incentive that makes the risk more palatable in my opinion. If you are risk averse, I would go with a 30 year fixed, you never know what the future holds. If you have good money management skills and can bank the savings from the 7/1 ARM, I would go that route eliminating the 10/1 as an option all together. There are some aggressively priced 7/1' out there, let me know if I can assist.
  • April 30
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10/1 makes complete sense in your scenario and it sounds like a really good deal!

Best of luck to you!
  • April 30
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That honestly sounds like a really good deal.
  • April 30
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Profile picture for Brian GFL Capital
i like your train of thought so far. no reason to get a 30 year. 7 year is too short. not sure what the rate difference between a 10 and 7. usually a 10 isnt much better than a 30 year so its not the most attractive an ARM program
  • April 30
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