PenFed 5/5 ARM advice

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ChesapeakeTechie
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PenFed 5/5 ARM advice

Post by ChesapeakeTechie »

Hi everyone - we are looking at buying a house with 20% down and the loan will fall into the jumbo category. Rates look to be anywhere from 4.375% with 1 point to 4.5% with 0 points right now.
Looks like PenFed is offering a 5/5 ARM with 30 year amortization for 2.75% currently.
Looks like after 5 years the rate can bump a max of 2% and again every 5 years for a max of 7.75%.
Assuming a prepayment the first 10 years (Putting $300 addtl towards principal) on a $510k note, assuming we were planning to stay in the house 30+ years is this better than a jumbo 30 year fixed @ 4.375 with 1 point?

Has anyone else considered this over a 30 year loan?

We are planning on staying in this house until retirement (36 now) - in our previous house we have refi'd 3 times (initial loan was 30 yr @ 7%, then to a 15 yr @ 4.625% then to a 15 yr @ 2.875% fixed through PenFed). PITI is $1400 for another 13 years.
We also plan on keeping the first house and renting it out.

So in 15 years, I'd have another $1400 from the rental property to put towards the new home loan.

Advice would be appreciated!
Last edited by ChesapeakeTechie on Tue Mar 11, 2014 4:47 pm, edited 1 time in total.
an_asker
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Re: PenFed 15 Year ARM?

Post by an_asker »

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Last edited by an_asker on Wed Mar 12, 2014 10:53 am, edited 1 time in total.
Topic Author
ChesapeakeTechie
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Re: PenFed 5/5 ARM advice

Post by ChesapeakeTechie »

Thanks! Anyone have any thoughts on the 5/5 vs a 30 year based on the scenario above?
inbox788
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Re: PenFed 5/5 ARM advice

Post by inbox788 »

ChesapeakeTechie wrote:Thanks! Anyone have any thoughts on the 5/5 vs a 30 year based on the scenario above?
It goes without saying, but I'll say it anyway, it depends on the future interest rates. If rates don't change much, then the variable rate is better, but if rates max out, then the fixed rate is better. What is your interest rate outlook and do you wish to take on interest rate risk?

Adding an extra $300 monthly payment might shorten the loan by about 5 years, which still exposes you to a long period of rate uncertainty, even with the 15/15. If you can get the payment up, and be confident the loan will be paid off in 10-20 years, the 15/15 may be a good option. The only way I'd take on the 5/5 is if I planned to sell the property, my outlook were rates wouldn't increase, I can manage a big spike in interest rates, and/or I'd have the loan paid off in 10-15 years or less.
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Rob5TCP
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Re: PenFed 5/5 ARM advice

Post by Rob5TCP »

You paying more on a 30 year (or 15 year) for the assurance of a fixed amount each month.
Interest rates are the lowest I have ever seen them. Will be like Japan and have low rates for 25 years?
I don't know.
It's a risk only you can access. There is a possibility that rates go up and yours go to 4.75 in 5 years
and 6.75 in 10 years and so on until the max is reached.

You do have a 10 year cushion and a ceiling of 7.75%. It would be many many years before the
ARM costs exceed the fixed, in a rising interest rate environment.

The breakeven point is probably closest to 15 years (5 years 2 points below, 5 even, and
5 years 2% points higher).

Normally I would go with the fixed rate, but your offer is an attractive one.
BruDude
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Re: PenFed 5/5 ARM advice

Post by BruDude »

I think the break-even point is around 13 years versus fixed even in a worst-case scenario. If you are not going to plan on living in the house for 20+ years I would go with the 5/5 ARM. PenFed paying the closing costs makes it an even better deal.
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kenyan
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Re: PenFed 5/5 ARM advice

Post by kenyan »

Recently refinanced into this product after having our 30-year fixed for only four months. Our refinance was from a 4.75% fixed into the 5/5 at 2.625%. No closing costs were paid, as advertised. Like you, we plan to prepay, at least while the interest rate is exceedingly low. The prepayment we are planning takes the worst-case breakeven at well over 20 years, and I believe that even with no prepayment it was in the 19-year timeframe (assuming a modest time value of money). That's a very long time, and chances are that we will have either paid the mortgage down substantially, moved (though we have no plans to), or refinanced again. Even if none of those things - all of which favor the ARM - come to pass, the worst-case scenario only puts us slightly behind with the ARM.

Your numbers are not quite as ARM-friendly as ours were, but similar overall.
Retirement investing is a marathon.
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Watty
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Re: PenFed 5/5 ARM advice

Post by Watty »

I saw a post recently that mentioned that the long running "no-cost" promotion had ended, as least for now, on the PenFed 5/5 ARM so you would want to double check the details of that.

Part of the reason that the 30 year mortgage costs more than other loans is that you could end up still having it when inflation and interest rates are higher. By paying extra each month you are reducing the length of the loan which would not be to your advantage if rates go up. An alternative would be to save a significant amount and then see if the lender will "recast the mortgage"(Google this). This would keep the rate and length of the mortgage the same but lower your required monthly payment.

If you are truly sure you will stay in the house for a long time then you should look into paying additional points to buy down the interest rate of a 30 year fixed rate loan. As I recall the breakeven point of doing this us usually around 7 to 8 years.

I would also consider when you will likely retire. For many people have a house paid off by the time they retire makes sense so you might want not want to get a mortage with londer terms than that.
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ChesapeakeTechie
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Re: PenFed 5/5 ARM advice

Post by ChesapeakeTechie »

Thanks for the responses. It looks like the no closing cost deal is over at least for now. That being said there is a one-click rate lock available for an extra .25% which lets one lock the rate in for an additional 5 years after being in the current rate for 1 year. This can be done 5 times during the loan.
Has anyone actually used this and can you provide any insight?

Can you do something like this:
Year 1 - 3 3% Lock in 4% in Year 3
Year 4 - 8 4%
Year 9 - 13 4%
Year 14 - 18 3.5% Lock in 3.5% in Year 18
Year 19 - 23 3.5%
Year 24 - 27 4% Rate decline lock in Year 27
Year 28 - 30 3.5%

Thanks!
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kenyan
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Re: PenFed 5/5 ARM advice

Post by kenyan »

ChesapeakeTechie wrote:Thanks for the responses. It looks like the no closing cost deal is over at least for now. That being said there is a one-click rate lock available for an extra .25% which lets one lock the rate in for an additional 5 years after being in the current rate for 1 year. This can be done 5 times during the loan.
Has anyone actually used this and can you provide any insight?

Can you do something like this:
Year 1 - 3 3% Lock in 4% in Year 3
Year 4 - 8 4%
Year 9 - 13 4%
Year 14 - 18 3.5% Lock in 3.5% in Year 18
Year 19 - 23 3.5%
Year 24 - 27 4% Rate decline lock in Year 27
Year 28 - 30 3.5%

Thanks!
There have been some discussions about it, but I haven't heard anyone pipe up, stating that they had used it. This feature was added shortly after I locked my rate in, but I wouldn't have opted for it. While it's certainly true that you can conjure scenarios where it is beneficial, optimization of this does require some foresight/luck. I personally think the cost for this 'insurance' is too high.
Retirement investing is a marathon.
MichDad
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Re: PenFed 5/5 ARM advice

Post by MichDad »

One thing to keep in mind is that if you choose the 5/5 ARM product, the new interest rate that takes effect after the first (and second and third, etc.) five year period expires will be applied to the remaining principal balance -- a balance that may have declined by quite a bit if you're making extra principal payments. So, even if the interest rate increases by the maximum allowable amount, that may not translate into significantly higher monthly mortgage payments.

MichDad
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wilpat
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Re: PenFed 5/5 ARM advice

Post by wilpat »

I am using the PenFed 5/5/ARM (got it about a year ago starting @2.5%).
I did mine that way because my situation is probably not the normal.
Any time the rate goes to high for my liking I will simply pay the loan off.
Contrary to the belief of many, profit is not a four letter word!
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Watty
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Re: PenFed 5/5 ARM advice

Post by Watty »

ChesapeakeTechie wrote:Thanks for the responses. It looks like the no closing cost deal is over at least for now. That being said there is a one-click rate lock available for an extra .25% which lets one lock the rate in for an additional 5 years after being in the current rate for 1 year. This can be done 5 times during the loan.
Has anyone actually used this and can you provide any insight?
It varies but right now the first five years is discounted at 2.75% and the next 25 are at 3.5% which I would assume is their true current rate. It looks like if you took that option now it would reset the rate to 3.5% so I don't think that option is really worth a lot.
mikep
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Re: PenFed 5/5 ARM advice

Post by mikep »

wilpat wrote:I am using the PenFed 5/5/ARM (got it about a year ago starting @2.5%).
I did mine that way because my situation is probably not the normal.
Any time the rate goes to high for my liking I will simply pay the loan off.
That is easy to say now, but if the rate goes higher, other rates will follow. Example the loan goes to 4.5% and savings accounts are 6% again. Most will wish they had a 3% ish fixed.
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kenyan
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Re: PenFed 5/5 ARM advice

Post by kenyan »

Watty wrote:
ChesapeakeTechie wrote:Thanks for the responses. It looks like the no closing cost deal is over at least for now. That being said there is a one-click rate lock available for an extra .25% which lets one lock the rate in for an additional 5 years after being in the current rate for 1 year. This can be done 5 times during the loan.
Has anyone actually used this and can you provide any insight?
It varies but right now the first five years is discounted at 2.75% and the next 25 are at 3.5% which I would assume is their true current rate. It looks like if you took that option now it would reset the rate to 3.5% so I don't think that option is really worth a lot.
Even a bit worse, since those numbers don't include the 250 basis point premium. There is indeed a teaser for the first 5 years, at which point the rate resets to the 5 year Constant maturity Treasury rate + 2%. If you elect to take this option, your teaser rate is 250 bp higher, and your rate resets will all be at 5-year CMT + 2.25%.
Retirement investing is a marathon.
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