30 year fixed vs 7 year ARM

Questions on how we spend our money and our time - consumer goods and services, home and vehicle, leisure and recreational activities
Post Reply
drmoneytails
Posts: 63
Joined: Fri Nov 25, 2016 1:43 pm

30 year fixed vs 7 year ARM

Post by drmoneytails » Mon Mar 05, 2018 8:09 am

We are first time home buyers.
Under contract now; loan of 765k; no PMI
Options are:
30 year fixed at 4.375%, monthly payment $3,819
7 year ARM at 3.5%, monthly payment $3,435

We can make either payment with no problem and in fact, if I were to go with the lower rate I would pay extra anyway (we are disciplined enough to do that).

What do you guys suggest?

JoeRetire
Posts: 1649
Joined: Tue Jan 16, 2018 2:44 pm

Re: 30 year fixed vs 7 year ARM

Post by JoeRetire » Mon Mar 05, 2018 8:30 am

I'm a believer in locking in low interest fixed rates for the longest period available.
You can always re-mortgage later in the unlikely case that rates drop enough.

How long to you intend to live in this property?
Last edited by JoeRetire on Mon Mar 05, 2018 8:32 am, edited 1 time in total.

cherijoh
Posts: 4960
Joined: Tue Feb 20, 2007 4:49 pm
Location: Charlotte NC

Re: 30 year fixed vs 7 year ARM

Post by cherijoh » Mon Mar 05, 2018 8:31 am

drmoneytails wrote:
Mon Mar 05, 2018 8:09 am
We are first time home buyers.
Under contract now; loan of 765k; no PMI
Options are:
30 year fixed at 4.375%, monthly payment $3,819
7 year ARM at 3.5%, monthly payment $3,435

We can make either payment with no problem and in fact, if I were to go with the lower rate I would pay extra anyway (we are disciplined enough to do that).

What do you guys suggest?
How long do you plan to stay in the house? If 7 years or less, the ARM would be favored. For a longer period, it would depend on the specific terms of the ARM and how long it would take you to pay it down the loan at your target payment. You can run a mortgage amortization calculator to figure out when you would be able to retire a mortgage based on the amount of extra payment.

What are the terms on the ARM? For example after the first seven yours how often with the interest rate reset (e.g., every year)? What is the maximum increase in interest rate per period? What is the maximum interest rate increase over the life of the loan? Without these additional details it is impossible to give you an informed opinion. Just be aware that you are taking on a portion of the interest rate risk that the lender assumes with a fixed rate mortgage.

michaeljc70
Posts: 3746
Joined: Thu Oct 15, 2015 3:53 pm

Re: 30 year fixed vs 7 year ARM

Post by michaeljc70 » Mon Mar 05, 2018 10:56 am

Unless there was a very good chance you'd be staying less than 7 years, I'd take the 30 year. What if rates are 7% in 7 years?

DrGoogle2017
Posts: 1322
Joined: Mon Aug 14, 2017 12:31 pm

Re: 30 year fixed vs 7 year ARM

Post by DrGoogle2017 » Mon Mar 05, 2018 10:59 am

I would take 30 years even if you might move.

bloom2708
Posts: 4909
Joined: Wed Apr 02, 2014 2:08 pm
Location: Fargo, ND

Re: 30 year fixed vs 7 year ARM

Post by bloom2708 » Mon Mar 05, 2018 11:43 am

I would do the 7 year ARM. I do not know what the rate will be in 7 years.

$400/month on the same 30 year amortization schedule would be significant enough to revisit 7 years from now.
"We are not here to please, but to provoke thoughtfulness." --Unknown Boglehead

DVMResident
Posts: 1258
Joined: Mon Aug 01, 2011 8:15 pm

Re: 30 year fixed vs 7 year ARM

Post by DVMResident » Mon Mar 05, 2018 12:06 pm

Would the potential increase really be a hardship?
How long do you plan to stay there?

I lean towards the 7 ARM and putting the extra $384/month (or more) towards the principle. Most people should do this as the average person only live in their SFH for 9 years and are not well served by 30 years loans.

However, after the 7 year indexed (fixed) period, with a loan that large may swing wildly in monthly payments. Now risk will be offset (in part or in whole) by the reforecast on extra principle reduction and rising interest rates will improve the performance of fixed assets. In the absence of serious risk to your fiscal stability, I would lean towards the ARM.

User avatar
unclescrooge
Posts: 2616
Joined: Thu Jun 07, 2012 7:00 pm

Re: 30 year fixed vs 7 year ARM

Post by unclescrooge » Mon Mar 05, 2018 12:14 pm

michaeljc70 wrote:
Mon Mar 05, 2018 10:56 am
Unless there was a very good chance you'd be staying less than 7 years, I'd take the 30 year. What if rates are 7% in 7 years?
What if we're in a recession and rates are at 2%? :mrgreen:

chw
Posts: 478
Joined: Thu May 24, 2012 4:22 pm

Re: 30 year fixed vs 7 year ARM

Post by chw » Mon Mar 05, 2018 12:21 pm

As a former mortgage banker I would go with the 7 year ARM and take the savings to pay down the principal- make sure to autopay your payments to do this. In my experience, the average loan refis or is paid off due to home sale every 4-5 years in any type of rate environment. Make sure you understand how the rate adjusts in 7 years, and what rate caps are in place should the loan become an ARM.

michaeljc70
Posts: 3746
Joined: Thu Oct 15, 2015 3:53 pm

Re: 30 year fixed vs 7 year ARM

Post by michaeljc70 » Mon Mar 05, 2018 12:26 pm

unclescrooge wrote:
Mon Mar 05, 2018 12:14 pm
michaeljc70 wrote:
Mon Mar 05, 2018 10:56 am
Unless there was a very good chance you'd be staying less than 7 years, I'd take the 30 year. What if rates are 7% in 7 years?
What if we're in a recession and rates are at 2%? :mrgreen:
It's possible, but since 7 year ARMS or 30 year fixed have never been at 2%, I wouldn't count on it. When you look at the history of mortgage rates we are closer to the low end than the high end. Of course it is a guess, but an educated guess.

Another minor point is, you need to qualify to refinance. If the home dropped in value or you were laid off or a number of other (probably unlikely) things were to happen it could be an issue. I was moving and was self employed a few years ago . I could not get a mortgage even though I could easily afford the payment/home (underwriting rules due to length of time being self employed). Fortunately, I had enough from the last sale to pay cash, but it wasn't ideal.

wrongfunds
Posts: 1883
Joined: Tue Dec 21, 2010 3:55 pm

Re: 30 year fixed vs 7 year ARM

Post by wrongfunds » Mon Mar 05, 2018 12:30 pm

30 year rates were less than 4.375% in recent past. The rates seem to be on rise. Given that, I think if I were in your shoes, I would rather have rate locked and select fixed rate mortgage. From what I remember, the rates were under 4 not too long ago. Lot of them were under even 3 but I wonder if those were for 15 years.

User avatar
Watty
Posts: 14390
Joined: Wed Oct 10, 2007 3:55 pm

Re: 30 year fixed vs 7 year ARM

Post by Watty » Mon Mar 05, 2018 12:34 pm

michaeljc70 wrote:
Mon Mar 05, 2018 10:56 am
Unless there was a very good chance you'd be staying less than 7 years, I'd take the 30 year. What if rates are 7% in 7 years?
If the interest rate for the ARM can only increase by 1% in year 8 that would only bring it up to 4.5% which is barely higher than the fixed rate loan.

I didn't crunch the numbers but the breakeven point will be farther out than 7 years. For example if you were certain that you would sell the house in 10 or even 11 years(just a guess) then the ARM might still be a good choice since you would save so much in the first seven years that paying the maximum increases for a couple of more years might still be worthwhile.

This is especially true if you have been prepaying the mortgage and have a lower balance then.
drmoneytails wrote:
Mon Mar 05, 2018 8:09 am
30 year fixed at 4.375%, monthly payment $3,819
7 year ARM at 3.5%, monthly payment $3,435
The fixed rate mortgage is 25% higher than the ARM, that is a lot.

A couple of questions;

The fixed will cost you $384 a month more but if you are able to deduct the interest the actual out of pocket cost will be less. About how much would that be? (Maybe $250????)

Will you also be maxing out all your deductible retirement accounts like a 401K? If not then with the ARM you could put that $384 a month into the 401K and get some tax savings.

Did you also get a quote for a 10 year ARM?

What are the maximum possible yearly and total rate increases with the ARM after 7 years?

Without crunching the numbers I would likely lean towards the ARM but making the higher mortgage payment that the fixed loan would have.

Part of my reasoning is that fixed rates might dip again and it is possible(I won't say probable) that you might be able to refinance to a fixed rate loan at below 4% in the next year or two. Keep an eye on this since if rates do dip it may only be for a short time.

LoganLot
Posts: 9
Joined: Fri Oct 13, 2017 1:36 pm

Re: 30 year fixed vs 7 year ARM

Post by LoganLot » Mon Mar 05, 2018 12:58 pm

Generally speaking, I'm a fan of 7 and 10 yr ARMs over fixed as long as the borrower truly understands how they work.

There's the fact that few people can be sure where they'll be that far out, which has been mentioned above.

I also like the cash flow flexibility they can give you after they start to reset. A disciplined borrower can put extra money towards principal during the fixed period, and plan for worst case interest adjustments. After the loan adjusts, the monthly payment obligation should go down if you’ve planned accordingly, and the borrower now has the flexibility to continue to put extra money towards the principal, or pay the minimum for a few months if the cash is needed elsewhere.

inbox788
Posts: 5666
Joined: Thu Mar 15, 2012 5:24 pm

Re: 30 year fixed vs 7 year ARM

Post by inbox788 » Mon Mar 05, 2018 1:22 pm

drmoneytails wrote:
Mon Mar 05, 2018 8:09 am
We can make either payment with no problem and in fact, if I were to go with the lower rate I would pay extra anyway (we are disciplined enough to do that).

What do you guys suggest?
Is it going to take you closer to 7 year or 30 years to pay off the mortgage if you stay disciplined? If you're only adding $100 a month, all the discipline in the world isn't going to help you cut that many months off the 30 years schedule. If you plan is to pay $3000 a month or more and be done in 7-10 years, then the 7 year ARM makes a whole lot more sense. Even if you're left with $200-300k in principal and interest goes to 8%, it's less total interest in dollars than $600k at 4%. And such high interest will surely light a fire under you to finish it off.

If your plan or expectation is somewhere in between, maybe a 15 year is a good way to split the difference. BTW, that's a pretty big difference in rates you're quoting vs. what I've seen recently, so I'd double check if there are other differences. The 30 year is in line, but the 7 year ARM seems low for a rate. Of course if the gap is small, then the 30 year is the way to go.

craimund
Posts: 69
Joined: Thu Feb 15, 2018 3:39 pm
Location: Virginia

Re: 30 year fixed vs 7 year ARM

Post by craimund » Mon Mar 05, 2018 3:35 pm

unclescrooge wrote:
Mon Mar 05, 2018 12:14 pm
michaeljc70 wrote:
Mon Mar 05, 2018 10:56 am
Unless there was a very good chance you'd be staying less than 7 years, I'd take the 30 year. What if rates are 7% in 7 years?
What if we're in a recession and rates are at 2%? :mrgreen:
Refi all the way down.

I would go 30 if I planned to stay more than 7 years. I know these weren't offered as options but a 10/1 or 20 year fixed might be a decent alternative.
"When you ain't got nothing, you got nothing to lose"-Bob Dylan 1965. "When you think that you've lost everything, you find out you can always lose a little more"-Dylan 1997

guilard1
Posts: 9
Joined: Fri Mar 02, 2018 11:25 am

Re: 30 year fixed vs 7 year ARM

Post by guilard1 » Mon Mar 05, 2018 3:49 pm

I don't know the specifics for either loan or other details of your life and financial goals.
Let's assume the max interest rate on the arm would be 7% (double), then you would end up paying 5666.25 (if my math is correct). That event is highly unlikely. If it every did occur, then it would probably take years to get to that point, and you would probably have it paid off by then already. However if you can handle that, then go for the 7 year loan, there is no reason not to. If the answer is that 'no' you couldn't handle $5666 payment, then the answer becomes more muddied, and would depend upon how much risk you would want to assume. Also be aware that if interest rates spike that high, then it might also be hard to refinance. I remember trying to refinance is 2007/2008 and I ended up, not doing a refi because it seemed like mostly bad deals. My philosophy is that A mortgage should not be with you until death (despite the name). The sooner you can pay that off, the easier it is to move to your other financial goals and without a house payment you are on very solid financial ground.

One last note. I dislike the idea of an ARM, but I hate the idea of a 30 year mortgage even more.

drmoneytails
Posts: 63
Joined: Fri Nov 25, 2016 1:43 pm

Re: 30 year fixed vs 7 year ARM

Post by drmoneytails » Tue Mar 06, 2018 7:28 am

Thank you all for all the responses.
I gathered a few more details, and read a little more about the ARMs so I truly understand them.

A bit more about our situation: we do and will continue to max out all our tax advantaged accounts (401k, HSA, 529 if/when we have kids) and we save extra in a taxable

I honestly have no idea where we will be in 7 years - an educated guess will be that we will move to a different state in about 10 years (wife hates the cold)

About the 7 ARM:
7/1 ARM: +/- 5% on the first rate adjustment and +/- 2% adjustment thereafter.
Lifetime Cap : 7/1 ARM: 5% over initial rate
Margin 2.750%

I am leaning towards the 7 ARM. I have the rates I quoted originally locked and just need to decide on one of them soon. I am thinking that, because we are disciplined savers, we will likely have a good chunk of money saved/invested in 7 years. If worse case scenario happens and rate jumps to 8.5% on year 8, i can pay off a big portion of the mortgage to make the payments doable and then accelerate payments / refi.

User avatar
midareff
Posts: 5804
Joined: Mon Nov 29, 2010 10:43 am
Location: Biscayne Bay, South Florida

Re: 30 year fixed vs 7 year ARM

Post by midareff » Tue Mar 06, 2018 7:54 am

unclescrooge wrote:
Mon Mar 05, 2018 12:14 pm
michaeljc70 wrote:
Mon Mar 05, 2018 10:56 am
Unless there was a very good chance you'd be staying less than 7 years, I'd take the 30 year. What if rates are 7% in 7 years?
What if we're in a recession and rates are at 2%? :mrgreen:
Then refinance.

"I am leaning towards the 7 ARM. I have the rates I quoted originally locked and just need to decide on one of them soon. I am thinking that, because we are disciplined savers, we will likely have a good chunk of money saved/invested in 7 years. If worse case scenario happens and rate jumps to 8.5% on year 8, i can pay off a big portion of the mortgage to make the payments doable and then accelerate payments / refi."

That's a solid plan.

holycow007
Posts: 43
Joined: Sun Aug 19, 2012 10:23 pm

Re: 30 year fixed vs 7 year ARM

Post by holycow007 » Tue Mar 06, 2018 8:12 am

was in same boat some time ago and went with the 7 year ARM at 3.125% vs 30 yr at 3.5%
Chose the former. Had thoughts about it multiple times since it forces me to part with cash to bring the mortgage to a manageable. There is always that fear of the 7-10% rate with inflation.
I think I can do it. Mine is a lower # than yours but likely the income is lower as well.

DVMResident
Posts: 1258
Joined: Mon Aug 01, 2011 8:15 pm

Re: 30 year fixed vs 7 year ARM

Post by DVMResident » Tue Mar 06, 2018 10:38 am

drmoneytails wrote:
Tue Mar 06, 2018 7:28 am
Thank you all for all the responses.
I gathered a few more details, and read a little more about the ARMs so I truly understand them.

A bit more about our situation: we do and will continue to max out all our tax advantaged accounts (401k, HSA, 529 if/when we have kids) and we save extra in a taxable

I honestly have no idea where we will be in 7 years - an educated guess will be that we will move to a different state in about 10 years (wife hates the cold)

About the 7 ARM:
7/1 ARM: +/- 5% on the first rate adjustment and +/- 2% adjustment thereafter.
Lifetime Cap : 7/1 ARM: 5% over initial rate
Margin 2.750%

I am leaning towards the 7 ARM. I have the rates I quoted originally locked and just need to decide on one of them soon. I am thinking that, because we are disciplined savers, we will likely have a good chunk of money saved/invested in 7 years. If worse case scenario happens and rate jumps to 8.5% on year 8, i can pay off a big portion of the mortgage to make the payments doable and then accelerate payments / refi.
Good plan!

I'll echo my and bloom2708's previous suggestion: put the extra savings towards the principle.

michaeljc70
Posts: 3746
Joined: Thu Oct 15, 2015 3:53 pm

Re: 30 year fixed vs 7 year ARM

Post by michaeljc70 » Tue Mar 06, 2018 10:46 am

If you can afford the payment on a 15 year, that might be a way to split the difference on the rates and have less risk. I know the others are locked so maybe that isn't an option.

DVMResident
Posts: 1258
Joined: Mon Aug 01, 2011 8:15 pm

Re: 30 year fixed vs 7 year ARM

Post by DVMResident » Tue Mar 06, 2018 11:55 am

michaeljc70 wrote:
Tue Mar 06, 2018 10:46 am
If you can afford the payment on a 15 year, that might be a way to split the difference on the rates and have less risk. I know the others are locked so maybe that isn't an option.
You can target to payoff an ARM in 15 years (although the monthly payment/recast will adjusted back to 30 years schedule). Spread is negligible (as of today, WF 7/1 ARM = 15y fix, BofA 7/1 ARM is discounted 1/8 vs 15y fixed). So it doesn't make much difference.

Given the OP is unlikely to keep the mortgage for >10 years, ARM gives flexibility with limited downside. I'd still favor the 7/1 ARM over a 15 year fixed.

WhiteMaxima
Posts: 1462
Joined: Thu May 19, 2016 5:04 pm

Re: 30 year fixed vs 7 year ARM

Post by WhiteMaxima » Tue Mar 06, 2018 12:10 pm

the break even pt is around 10 year of stay. nobody knows rate the future rate would be. I chosen 7 years ARM since I can save more on interest payment.

michaeljc70
Posts: 3746
Joined: Thu Oct 15, 2015 3:53 pm

Re: 30 year fixed vs 7 year ARM

Post by michaeljc70 » Tue Mar 06, 2018 12:12 pm

DVMResident wrote:
Tue Mar 06, 2018 11:55 am
michaeljc70 wrote:
Tue Mar 06, 2018 10:46 am
If you can afford the payment on a 15 year, that might be a way to split the difference on the rates and have less risk. I know the others are locked so maybe that isn't an option.
You can target to payoff an ARM in 15 years (although the monthly payment/recast will adjusted back to 30 years schedule). Spread is negligible (as of today, WF 7/1 ARM = 15y fix, BofA 7/1 ARM is discounted 1/8 vs 15y fixed). So it doesn't make much difference.

Given the OP is unlikely to keep the mortgage for >10 years, ARM gives flexibility with limited downside. I'd still favor the 7/1 ARM over a 15 year fixed.
What are you gaining by taking the 7 year ARM? I guess more flexibility in the payment. The rates are almost the same. His rate can go up 5% to 8.5%. Rates have been close to that in the last 20 years. Is it likely, no. But predicting where interest rates will be in 7 years is impossible. OP said "I honestly have no idea where we will be in 7 years - an educated guess will be that we will move to a different state in about 10 years (wife hates the cold)". Things can change. I'd rather have the guaranteed rate than the flexibility to pay less per month (and it sounds like the OP would pay more on the 7 ARM anyway).

DVMResident
Posts: 1258
Joined: Mon Aug 01, 2011 8:15 pm

Re: 30 year fixed vs 7 year ARM

Post by DVMResident » Tue Mar 06, 2018 12:39 pm

michaeljc70 wrote:
Tue Mar 06, 2018 12:12 pm
DVMResident wrote:
Tue Mar 06, 2018 11:55 am
michaeljc70 wrote:
Tue Mar 06, 2018 10:46 am
If you can afford the payment on a 15 year, that might be a way to split the difference on the rates and have less risk. I know the others are locked so maybe that isn't an option.
You can target to payoff an ARM in 15 years (although the monthly payment/recast will adjusted back to 30 years schedule). Spread is negligible (as of today, WF 7/1 ARM = 15y fix, BofA 7/1 ARM is discounted 1/8 vs 15y fixed). So it doesn't make much difference.

Given the OP is unlikely to keep the mortgage for >10 years, ARM gives flexibility with limited downside. I'd still favor the 7/1 ARM over a 15 year fixed.
What are you gaining by taking the 7 year ARM? I guess more flexibility in the payment. The rates are almost the same. His rate can go up 5% to 8.5%. Rates have been close to that in the last 20 years. Is it likely, no. But predicting where interest rates will be in 7 years is impossible. OP said "I honestly have no idea where we will be in 7 years - an educated guess will be that we will move to a different state in about 10 years (wife hates the cold)". Things can change. I'd rather have the guaranteed rate than the flexibility to pay less per month (and it sounds like the OP would pay more on the 7 ARM anyway).
Shrug, I'd rather taking on the interest risk IF I stay longer than my spouse wants over adding $2,033 to my minimum monthly obligations, which increases liquidity/cash-flow risks (e.g. job). Personal call.

User avatar
unclescrooge
Posts: 2616
Joined: Thu Jun 07, 2012 7:00 pm

Re: 30 year fixed vs 7 year ARM

Post by unclescrooge » Tue Mar 06, 2018 4:17 pm

midareff wrote:
Tue Mar 06, 2018 7:54 am
unclescrooge wrote:
Mon Mar 05, 2018 12:14 pm
michaeljc70 wrote:
Mon Mar 05, 2018 10:56 am
Unless there was a very good chance you'd be staying less than 7 years, I'd take the 30 year. What if rates are 7% in 7 years?
What if we're in a recession and rates are at 2%? :mrgreen:
Then refinance.

"I am leaning towards the 7 ARM. I have the rates I quoted originally locked and just need to decide on one of them soon. I am thinking that, because we are disciplined savers, we will likely have a good chunk of money saved/invested in 7 years. If worse case scenario happens and rate jumps to 8.5% on year 8, i can pay off a big portion of the mortgage to make the payments doable and then accelerate payments / refi."

That's a solid plan.
Yup, that was exactly my thinking too.

JoeRetire
Posts: 1649
Joined: Tue Jan 16, 2018 2:44 pm

Re: 30 year fixed vs 7 year ARM

Post by JoeRetire » Tue Mar 06, 2018 4:19 pm

unclescrooge wrote:
Mon Mar 05, 2018 12:14 pm
michaeljc70 wrote:
Mon Mar 05, 2018 10:56 am
Unless there was a very good chance you'd be staying less than 7 years, I'd take the 30 year. What if rates are 7% in 7 years?
What if we're in a recession and rates are at 2%? :mrgreen:
Then it's time to refinance. Been there, done that - unfortunately not at 2%.

Raladic
Posts: 196
Joined: Fri Jan 03, 2014 4:56 pm

Re: 30 year fixed vs 7 year ARM

Post by Raladic » Tue Mar 06, 2018 7:54 pm

drmoneytails wrote:
Tue Mar 06, 2018 7:28 am
Thank you all for all the responses.
I gathered a few more details, and read a little more about the ARMs so I truly understand them.

A bit more about our situation: we do and will continue to max out all our tax advantaged accounts (401k, HSA, 529 if/when we have kids) and we save extra in a taxable

I honestly have no idea where we will be in 7 years - an educated guess will be that we will move to a different state in about 10 years (wife hates the cold)

About the 7 ARM:
7/1 ARM: +/- 5% on the first rate adjustment and +/- 2% adjustment thereafter.
Lifetime Cap : 7/1 ARM: 5% over initial rate
Margin 2.750%

I am leaning towards the 7 ARM. I have the rates I quoted originally locked and just need to decide on one of them soon. I am thinking that, because we are disciplined savers, we will likely have a good chunk of money saved/invested in 7 years. If worse case scenario happens and rate jumps to 8.5% on year 8, i can pay off a big portion of the mortgage to make the payments doable and then accelerate payments / refi.
So the main question you need to ask yourself is, if the market keeps going back to normal, your interest rate may very well be 8.5%, at which point your monthly payment will be $5882 on the ARM - are you still going to be comfortable with that payment?

You said you want to prepay the interest saving if you take the ARM, so that would be an extra $384 per month ($4608 per year) - that is really not that much and will only shave off a year and a bit off the 30 year term, and that is assuming that for the other 23 years after year 7 your interest rate doesn't change, which is unlikely, we are still very close to the historic low of interest rates.

But as I mentioned above, if your interest rate does go up (as is expected based on market), then it is quite possible that 2-3 minimum monthly payment increases could be the same as your whole interest saving for a single year based on the difference and you mentioned that you MAY move in 10 years, but that doesn't sound entirely sure and things can happen, but you do need a roof over your head, so is that worth the interest risk?

Basically based on the information and timeline you gave, I would take the 30 year mortgage, given that you could likely achieve a greater return by investing the difference in the market instead.

Prepaying your mortgage is usually not a financially sound decision, but an emotional one and since you are asking about the financial implications, it would lead towards the 30 year mortgage since your interest difference is really not 0.875 but something less if you're itemizing, but you have a much larger risk with the ARM at a potential 5% increase.

randomguy
Posts: 6504
Joined: Wed Sep 17, 2014 9:00 am

Re: 30 year fixed vs 7 year ARM

Post by randomguy » Tue Mar 06, 2018 8:19 pm

Raladic wrote:
Tue Mar 06, 2018 7:54 pm

So the main question you need to ask yourself is, if the market keeps going back to normal, your interest rate may very well be 8.5%, at which point your monthly payment will be $5882 on the ARM - are you still going to be comfortable with that payment?
The payment at 8.5% isn't 5882. It is about 5200. Even less if they apply the difference in payments to paying off the mortgage. Granted that is a big jump. But if the OP is one of the put money towards the mortgage crowd, the difference would be even less. .

An 8.5% interest rate while definitely feasible would be a result of a pretty huge run up in interest rates over a 7 year period. We haven't seen rates like that in 25 years when we were coming out of one of the biggest interest rate bubbles in US history. Go with a more moderate 5 or 6 % and the payment difference isn't very drastic. Is it worth the risk to take advantage of the upside of the lower rate? If you expect to move in 10 years or less, that is a pretty safe bet. Plan on being there over 30 years and the odds of the 30 year winning probably win out. And you have to think about what you do if you lose the bet. If you can just write a 600k check and pay off the loan, it is a lot easier to take the risk than if you have to make those payments.

User avatar
midareff
Posts: 5804
Joined: Mon Nov 29, 2010 10:43 am
Location: Biscayne Bay, South Florida

Re: 30 year fixed vs 7 year ARM

Post by midareff » Wed Mar 07, 2018 8:15 am

JoeRetire wrote:
Tue Mar 06, 2018 4:19 pm
unclescrooge wrote:
Mon Mar 05, 2018 12:14 pm
michaeljc70 wrote:
Mon Mar 05, 2018 10:56 am
Unless there was a very good chance you'd be staying less than 7 years, I'd take the 30 year. What if rates are 7% in 7 years?
What if we're in a recession and rates are at 2%? :mrgreen:
Then it's time to refinance. Been there, done that - unfortunately not at 2%.
Been there and done that too...... have about 24 years left at 3.00%.

Bacchus01
Posts: 1939
Joined: Mon Dec 24, 2012 9:35 pm

Re: 30 year fixed vs 7 year ARM

Post by Bacchus01 » Wed Mar 07, 2018 8:20 am

michaeljc70 wrote:
Mon Mar 05, 2018 12:26 pm
unclescrooge wrote:
Mon Mar 05, 2018 12:14 pm
michaeljc70 wrote:
Mon Mar 05, 2018 10:56 am
Unless there was a very good chance you'd be staying less than 7 years, I'd take the 30 year. What if rates are 7% in 7 years?
What if we're in a recession and rates are at 2%? :mrgreen:
It's possible, but since 7 year ARMS or 30 year fixed have never been at 2%, I wouldn't count on it. When you look at the history of mortgage rates we are closer to the low end than the high end. Of course it is a guess, but an educated guess.

Another minor point is, you need to qualify to refinance. If the home dropped in value or you were laid off or a number of other (probably unlikely) things were to happen it could be an issue. I was moving and was self employed a few years ago . I could not get a mortgage even though I could easily afford the payment/home (underwriting rules due to length of time being self employed). Fortunately, I had enough from the last sale to pay cash, but it wasn't ideal.
Ive has a 5 year at 2%

Bacchus01
Posts: 1939
Joined: Mon Dec 24, 2012 9:35 pm

Re: 30 year fixed vs 7 year ARM

Post by Bacchus01 » Wed Mar 07, 2018 8:23 am

Where’s your break even point? Even if the rate jumps the max in 7 years, I would bet that you are still better off through something like 12-14 years of the loan. That’s how you should look at it.

If you use the savings to pay down principle, it probably jumps to 20 years.

Also, consider a 15.

JoeRetire
Posts: 1649
Joined: Tue Jan 16, 2018 2:44 pm

Re: 30 year fixed vs 7 year ARM

Post by JoeRetire » Wed Mar 07, 2018 8:41 am

midareff wrote:
Wed Mar 07, 2018 8:15 am
JoeRetire wrote:
Tue Mar 06, 2018 4:19 pm
unclescrooge wrote:
Mon Mar 05, 2018 12:14 pm
michaeljc70 wrote:
Mon Mar 05, 2018 10:56 am
Unless there was a very good chance you'd be staying less than 7 years, I'd take the 30 year. What if rates are 7% in 7 years?
What if we're in a recession and rates are at 2%? :mrgreen:
Then it's time to refinance. Been there, done that - unfortunately not at 2%.
Been there and done that too...... have about 24 years left at 3.00%.
Nice! I'm jealous. My mortgage on my second home has about 24 years remaining at 3.875%

michaeljc70
Posts: 3746
Joined: Thu Oct 15, 2015 3:53 pm

Re: 30 year fixed vs 7 year ARM

Post by michaeljc70 » Wed Mar 07, 2018 9:46 am

unclescrooge wrote:
Mon Mar 05, 2018 12:14 pm
michaeljc70 wrote:
Mon Mar 05, 2018 10:56 am
Unless there was a very good chance you'd be staying less than 7 years, I'd take the 30 year. What if rates are 7% in 7 years?
What if we're in a recession and rates are at 2%? :mrgreen:
We were in a recession in January of 1982 and the average 30 year mortgage was 17% (and with 2 points)! A recession does not automatically mean low rates.

You can see the average 30 year rates since the 70s here:

http://www.freddiemac.com/pmms/pmms30.html

lazydavid
Posts: 1858
Joined: Wed Apr 06, 2016 1:37 pm

Re: 30 year fixed vs 7 year ARM

Post by lazydavid » Thu Mar 08, 2018 6:05 am

Not normally a fan of ARMs, but given the spread, I'd certainly consider this one, and then just pay $4k/month on it during the fixed period (I do like nice round numbers). Especially if your timeline is <10 years, the risk is relatively minimal.

Raladic
Posts: 196
Joined: Fri Jan 03, 2014 4:56 pm

Re: 30 year fixed vs 7 year ARM

Post by Raladic » Thu Mar 08, 2018 6:39 pm

randomguy wrote:
Tue Mar 06, 2018 8:19 pm
Raladic wrote:
Tue Mar 06, 2018 7:54 pm

So the main question you need to ask yourself is, if the market keeps going back to normal, your interest rate may very well be 8.5%, at which point your monthly payment will be $5882 on the ARM - are you still going to be comfortable with that payment?
The payment at 8.5% isn't 5882. It is about 5200. Even less if they apply the difference in payments to paying off the mortgage. Granted that is a big jump. But if the OP is one of the put money towards the mortgage crowd, the difference would be even less. .
Why do you think that?
Both Excel PMT function, as well as https://www.bankrate.com/calculators/mo ... lator.aspx return $5882 for a 8.5% interest on $765,000 loan amount.

michaeljc70
Posts: 3746
Joined: Thu Oct 15, 2015 3:53 pm

Re: 30 year fixed vs 7 year ARM

Post by michaeljc70 » Thu Mar 08, 2018 6:51 pm

Raladic wrote:
Thu Mar 08, 2018 6:39 pm
randomguy wrote:
Tue Mar 06, 2018 8:19 pm
Raladic wrote:
Tue Mar 06, 2018 7:54 pm

So the main question you need to ask yourself is, if the market keeps going back to normal, your interest rate may very well be 8.5%, at which point your monthly payment will be $5882 on the ARM - are you still going to be comfortable with that payment?
The payment at 8.5% isn't 5882. It is about 5200. Even less if they apply the difference in payments to paying off the mortgage. Granted that is a big jump. But if the OP is one of the put money towards the mortgage crowd, the difference would be even less. .
Why do you think that?
Both Excel PMT function, as well as https://www.bankrate.com/calculators/mo ... lator.aspx return $5882 for a 8.5% interest on $765,000 loan amount.
After 7 years they wouldn't still owe $765k.

sls239
Posts: 928
Joined: Thu Oct 23, 2008 4:04 pm

Re: 30 year fixed vs 7 year ARM

Post by sls239 » Thu Mar 08, 2018 7:32 pm

That's a high margin and a high initial adjustment.

That means that keeping the ARM after the first 7 years is not going to be cost effective.

Post Reply