does it make sesne to consider a 5/1 ARM?

[Anonymous]

DH and I have a 21 month old, and are hoping to have one more (currently trying). We currently live in a place with a standard 30 year fixed rate mortgage but are considering selling and moving. My dad, who passed away right when we were buying our place 5 years ago told me to always just stick with a fixed rate mortgage--15 years if possible, if not then 30 and not "play games." I respected my dad's judgement and wisdom a lot, but consider myself a pretty financially savvy person. We are thinking about looking at 5-year adjustable rate mortgages when we buy because we figure in 5 years at least the older child will be out of full-time daycare and we'll only be paying for aftercare, and hte other one will be all way out. We would try to refinance then anyway, but worst case we'd have some more flexibility in our monthly budget. We think this might be the way to get a little bit more house in the area we want. Does this make sense?

[Anonymous]

Rates are historically low. I'd go for the 15 or 25 year right now. Going for a 5/1 is risky if you are in a tight financial situation. If interest rates rise in that time, your payments could double when you have to get a new loan.

When I bought my first house, interest rates were 18 3/4% -- just for reference.

Economists will say that generally you will come out ahead with a variable rate mortgage (over a 30 year period). But, going the the adjustable rate when the market is at an all time low just doesn't make much sense to me.

[Anonymous]

If you're worried about the monthly payment amount, do a 30 yr fixed. PP is right, interest rates are low now and probably only going higher. In five years if you have more income to throw at the mortgage you can refi to a 15 yr or just make extra payments if interest rates are too high to make a refi worthwhile.

The reason a ARM is "less expensive" in terms of the monthly payment is that the bank has transferred some of the risk onto you. They can increase in the interest rate in five years so it's less risky for them than a 15 or 30 year fixed. For a mortgage you really want to minimize your OWN risk, not the bank's risk.

Besides, if things are so tight that the payment on a 30 yr fixed is not "flexible" enough, you're not ready to buy.

[Anonymous]

Historically low interest rates. Even if they go lower, how much lower can they go, they are zero-bounded! Lock in these rates for 30 yrs and hedge against inflation

But make sure stay affordable b/c honey, daycare costs wane, but summer camp, spring break camp, any sports or activities can quickly make up the difference. And not even mention college!!

[Anonymous]

Thanks all. You make really good points. Somehow those 5/1 rates seemed too good to be true, but when I think about what the interest rates could do in 5 years it is kind of scary. We will still with 30-year fixed. This may mean we have to leave S. Arlington and move further out, but it's good to have a reality check.

[Anonymous]

We did 5 year arm and our rate dropped every year after the expiration. It's been great

[Anonymous]

Anonymous wrote:We did 5 year arm and our rate dropped every year after the expiration. It's been great

You got lucky. I would not expect the next five years to be like the last.

Personally, with interest rates where they are, I would get a 15, 20 or 30 year fixed, unless I was likely to move in the next few years.

[Anonymous]

Anonymous wrote:

Anonymous wrote:We did 5 year arm and our rate dropped every year after the expiration. It's been great

You got lucky. I would not expect the next five years to be like the last.

Personally, with interest rates where they are, I would get a 15, 20 or 30 year fixed, unless I was likely to move in the next few years.

+1
From someone else who also is benefiting from having a 5/1 -- I wouldn't do it again now

[Anonymous]

We did a 5/1 decades ago when we wanted to get into our forever home, and it was the only way we could afford it. It was a good idea then. It was reasonable to assume that we would have more money in the future - to refinance if necessary. It probably saved us the step of starter house - then move again. We also could have done PMI. That would have worked too. Again, different time, different rates.

[Anonymous]

Also think about the 5/5 ARM from PenFed. Much better than the 5/1 and the point where the 30-year becomes a better option at current rates is about 10 years out, even if the rate jumps the maximum 2 some points at the 5 year mark.

Since many people don't stay in their house 10 years anymore, this is a good option.

[Anonymous]

we are just about to close on a house and do a 7:1 arm on a house that's over a million in Mclean. The ARM's of today are a slightly different beast than what they were even 5 years ago. They max out---so my 'worst case scenario is upping it to about 9% as the rate for the remainder of 30 years after the 7 years is up---which I can manage if I need to. If you look at a mortgage calculator, you can do a lot more with your money, and pay down a lot more equity with an arm than with a 30 year fixed. So we are doing the ARM for now. We may move, we may not---but I figure I can then pivot and lock a 15 year fixed in 7 years if I have to, and doing the math, I have 2 percentage points to play with even if interest rates rise in the next 7 years. If you look at what the fed has been saying about interest rates---for at least the next 5 years, I'd bet that rates are not going up much. But then again I'm betting. I may be wrong. If we move---I figure we won't be in the house for more than 7 years, so even then, I'll come out ahead. Ask me in 7 years if it was a smart decision or not.

[Anonymous]

Also, if you apply to principal the difference between the 30-year fixed payment and the 5-year ARM payments, you are likely to come out ahead on a refi scenario fuve years in the future in a higher interest rate environment.

You have to be disciplined to do that, but something to consider.

[Anonymous]

Anonymous wrote:Also think about the 5/5 ARM from PenFed. Much better than the 5/1 and the point where the 30-year becomes a better option at current rates is about 10 years out, even if the rate jumps the maximum 2 some points at the 5 year mark.

Since many people don't stay in their house 10 years anymore, this is a good option.

PP is absolutely correct.

Go with this type of instrument because the odds are that you will move within 10 years and at worst you will end up paying 2% more than whatever rate you start with on a 5/5 ARM.

No point in locking into a 30 year fixed rate no matter even if the rate is historically low unless you are sure that you will not move in the next 10 years.

[Anonymous]

Anonymous wrote:

Anonymous wrote:Also think about the 5/5 ARM from PenFed. Much better than the 5/1 and the point where the 30-year becomes a better option at current rates is about 10 years out, even if the rate jumps the maximum 2 some points at the 5 year mark.

Since many people don't stay in their house 10 years anymore, this is a good option.

PP is absolutely correct.

Go with this type of instrument because the odds are that you will move within 10 years and at worst you will end up paying 2% more than whatever rate you start with on a 5/5 ARM.

No point in locking into a 30 year fixed rate no matter even if the rate is historically low unless you are sure that you will not move in the next 10 years.

+1

[Anonymous]

We have a 5/5 from Penfed. Great. Even with the worst case reset we are still in for a low rate for at least 10 years.