20yr fixed, 30yr fixed, or 7/1 ARM

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beavers1505
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20yr fixed, 30yr fixed, or 7/1 ARM

Post by beavers1505 » Wed Apr 12, 2017 3:30 pm

Hi all. I'm a first time home buyer and I have some mortgage questions.

With 20% down, I can get a 30yr at 4.125%, or a 20 year at 3.875%. T difference in the monthly payments is about $250. I can afford either without issue, but I'd rather take the extra $250 and invest it elsewhere. Am I making the right decision going with the 30? I don't plan to stay in the home longer than 5-7 years, so I am also going to get some numbers on a 7/1 ARM tomorrow.

With the above rates, my monthly payments would equate to the following percentages of my monthly (gross/before tax) income:

30yr - 10%
20yr - 12%

I'm currently inclined to take the 30 year, but would like some input from the wise folks here. Thanks!

bloom2708
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Re: 20yr fixed, 30yr fixed, or 7/1 ARM

Post by bloom2708 » Wed Apr 12, 2017 3:39 pm

First home. Do you consider this a "starter home" or a "I'll be here a long time.." home? Then, how do you define "long term"? 5 years, 7 years, 10 years? Longer?

Knowing that many (some, most?) sell, buy, refinance, move, recast, I might be inclined to look at the 7/1 ARM if you can save .5% on the rate from the 30 year fixed.

A 7/1 ARM is amortized over the same 30 year period as the 30 year fixed. Best advice is to put down 20% to avoid PMI. There are a lot of good mortgage threads to read/browse with the search box.

Hard to know the future. You should be able to print out the amortization schedules for each and see how much interest you will pay after X years.
"We are not here to please, but to provoke thoughtfulness." --Unknown Boglehead

beavers1505
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Re: 20yr fixed, 30yr fixed, or 7/1 ARM

Post by beavers1505 » Wed Apr 12, 2017 3:43 pm

I would be very surprised if I were to stay in the house for longer than 5 years, but as you said, it's hard to predict the future. Nonetheless, I'm going to get some numbers for the ARM to consider. The state of the rate market makes the ARM highly unattractive to me at this point though.

I've read some of the past mortgage threads, but honestly I get somewhat lost in all of the back and forth between prepaying and ROI, so I figured I'd just start a new one.

remomnyc
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Re: 20yr fixed, 30yr fixed, or 7/1 ARM

Post by remomnyc » Wed Apr 12, 2017 3:44 pm

Unless your job is very secure or you are very liquid, I always advise to take the 30-year and smaller required monthly payments. You can always pay faster, but in case of job loss or other financial squeeze, having the flexibility of the lower payment is a nice cushion. I just priced rates today and the 10/1 ARM is 50 bps less and the 7/1 ARM is 75 bps less than the 30-year rate. I would go with the 10/1 ARM.

bloom2708
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Re: 20yr fixed, 30yr fixed, or 7/1 ARM

Post by bloom2708 » Wed Apr 12, 2017 3:47 pm

beavers1505 wrote:I would be very surprised if I were to stay in the house for longer than 5 years, but as you said, it's hard to predict the future. Nonetheless, I'm going to get some numbers for the ARM to consider. The state of the rate market makes the ARM highly unattractive to me at this point though.

I've read some of the past mortgage threads, but honestly I get somewhat lost in all of the back and forth between prepaying and ROI, so I figured I'd just start a new one.
Let's say you sell/move in 4 years. Then a 5/1 ARM or 7/1 ARM is no different than the 30 year fixed. You just paid more in interest. If you get to the 5 or 7, then the rate can adjust (up or down). When rates were falling, some ARM rates went down. In this environment rise is the pattern, but 5 or 7 years is a long way away.

We used a 5/1 ARM for our last mortgage. I knew we could pay it off within the 5 years. I went for the lowest rate and the lowest closing costs. It worked out great. Paid ~$500 in closing costs and paid it off within the 5 year period.
"We are not here to please, but to provoke thoughtfulness." --Unknown Boglehead

fishmonger
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Re: 20yr fixed, 30yr fixed, or 7/1 ARM

Post by fishmonger » Wed Apr 12, 2017 4:16 pm

beavers1505 wrote:I would be very surprised if I were to stay in the house for longer than 5 years
I'm sure you've done the calculation, but if that's the case why are you buying to begin with? We don't have any details with the area, home prices vs. renting, but transaction costs are significant in most real estate deals

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jimb_fromATL
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Re: 20yr fixed, 30yr fixed, or 7/1 ARM

Post by jimb_fromATL » Wed Apr 12, 2017 4:24 pm

With a guess at the rate, and assuming the same costs out of pocket at closing, here are some numbers to ponder.
If you want to give more specific details we can plug 'em in and get a closer estimate.

Code: Select all

                     _____	pay up front	   balance	      rate	  months	  payment	total paid	interest
          30 year mortgage	          $0	  $232,614	    4.250%	    360.	 $1144.32	  $411,956	$179,342
          20 year mortgage	          $0	  $232,614	    3.875%	    240.	 $1394.32	  $334,637	$102,023
make higher pmt on 30y mtg	          $0	  $232,614	    4.250%	  252.78	 $1394.32	  $352,459	$119,844
           finance 7/1 ARM	          $0	  $232,614	    3.650%	    360.	 $1064.12	  $383,082	$150,468
make higher payment on ARM	          $0	  $232,614	    3.650%	  233.17	 $1394.32	  $325,110	 $92,495
                          	 	 	 	 	 	  	 
 	How they will compare after 7 years
 							
              in 7. years:		  at month	   balance	    paid	   equity	  interest	% interest in pmts
          30 year mortgage		       84.	  $201,325	 $96,123	  $31,289	   $64,834	   67.4%
          20 year mortgage		       84.	  $170,665	$117,123	  $61,950	   $55,173	   47.1%
make higher pmt on 30y mtg		       84.	  $176,917	$117,123	  $55,697	   $61,426	   52.4%
           finance 7/1 ARM		       84.	  $198,546	 $89,386	  $34,068	   $55,317	   61.9%
make higher payment on ARM		       84.	  $166,997	$117,123	  $65,617	   $51,506	    44.%
 
[/size]
If you finance $232,614 at 4.25% for 360 months (30. years) the payment is $1144.32 per month for P&I. The total paid will be $411,956 with $179,342 interest

If you finance $232,614 at 3.875% for 240 months the payment is $1394.32 per month for P&I, which is a difference of $250. The total paid will be 240 x $1394.32 = $334,637 with $102,023 interest. The total is $77,319 less than the 30 year mortgage and cuts 120 months of payments.

However, if you just make the higher payment of $1394.32 on the 30 year 4.25% mortgage the balance of $232,614 at 4.25% will be paid off in 252.8 months (21.07 years). The total paid will be 252.78 x $1394.32 = $352,459 with $119,844 interest. This total is $59,497 less than the current mortgage ... and cuts 107 months of payments.

In this case, for the same money out of pocket, it would cost you you $17,821 and 91 more months in debt, but you'd have the option to drop back to the $250 lower payment if you felt you could earn more than the mortgage rate by investing it elsewhere.

According to bankrate.com 7/1 ARMS are averaging around 3.65%. If you finance $232,614 at 3.65% for 360 months (30. years) the payment is $1064.12 per month for P&I. The total paid will be $383,082 with $150,468 interest ... in the unlikely event that the rate would never change.

However, if you make the higher payment of $1394.32 on the ARM the balance of $232,614 at 3.65% ... with no change in rate ... it would be paid off in 233.2 months (19.43 years). The total paid would be 233.17 x $1394.32 = $325,110 with $92,495 interest.

This total would be $9,528 less than the 20 mortgage if the rate never changed. Not sure it's worth the gamble that the rate won't go higher on the ARM if you keep tt longer.


In 7 more years with the $1144 payment you'll owe $201,325 on the 30 year 4.25% mortgage, after paying $96,123 with $64,834 interest and $31,289 on the principal. 67.4% of your payments will be interest.

In 7 more years with the $1394 payment you'll owe $170,665 on the 20 year 3.875% mortgage, after paying $117,123 with $55,173 interest and $61,950 on the principal. 47.1% of your payments will be interest.

In more years with the $1394 payment you'll owe $176,917 on the 21 year 4.25% mortgage, after paying $117,123 with $61,426 interest and $55,697 on the principal. 52.4% of your payments will be interest.

In 7 more years with the $1064 payment you'll owe $198,546 on the 30 year 3.65% mortgage, after paying $89,386 with $55,317 interest and $34,068 on the principal. 61.9% of your payments will be interest.

In 7 more years with the $1394 payment you'll owe $166,997 on the 3.65% mortgage, after paying $117,123 with $51,506 interest and $65,617 on the principal. 44.% of your payments will be interest.

If you want to gamble on rates not going too high, or if you're sure you'll be selling the home not too long after an unfavorable rate adjustment, you could be putting your money to better use, but still not convinced it's worth the gamble.

jimb
Last edited by jimb_fromATL on Wed Apr 12, 2017 4:30 pm, edited 1 time in total.

beavers1505
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Re: 20yr fixed, 30yr fixed, or 7/1 ARM

Post by beavers1505 » Wed Apr 12, 2017 4:29 pm

fishmonger wrote:
beavers1505 wrote:I would be very surprised if I were to stay in the house for longer than 5 years
I'm sure you've done the calculation, but if that's the case why are you buying to begin with? We don't have any details with the area, home prices vs. renting, but transaction costs are significant in most real estate deals
To put it in the simplest terms possible, rentals in my area are prohibitively expensive, and akin to lighting my money on fire. Due to my career, closing costs are significantly lower for me than similarly situated individuals.

taguscove
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Re: 20yr fixed, 30yr fixed, or 7/1 ARM

Post by taguscove » Wed Apr 12, 2017 4:34 pm

If you are confident about moving within 10 years, I suggest you seriously look at a 7/1 ARM.

A 20 year or 30 year fixed exposes the lender to a substantial amount of interest rate risk ("duration" in bond language). The borrower even has the option of paying the mortgage early if interest rates fall. These are features that make interest rate higher for these longer term loans.

In contrast, the borrower is exposed to the interest rate risk after 7 years for a 7/1 ARM. As compensation, you'll pay a lower interest rate.

beavers1505
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Re: 20yr fixed, 30yr fixed, or 7/1 ARM

Post by beavers1505 » Wed Apr 12, 2017 4:35 pm

jimb_fromATL wrote:With a guess at the rate, and assuming the same costs out of pocket at closing, here are some numbers to ponder.
If you want to give more specific details we can plug 'em in and get a closer estimate.

jimb
Thanks for the highly informative post. So with the 30 year, I likely have two options. 4.125% with no lender credit, or 4.25% with some lender credit. I'll have more definitive numbers tomorrow. Nonetheless, it's likely that I'll take the 4.25 with some lender credit.

I'm with you, though, in that I'm not convinced it's worth the risk to me. It's easy for me to sit here and say there's no way I'll be in the home more than 7 years, but again, who knows.

Also, FWIW, my loan amount will be $213,520.

DVMResident
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Re: 20yr fixed, 30yr fixed, or 7/1 ARM

Post by DVMResident » Wed Apr 12, 2017 4:42 pm

I'm seeing a 0.5% to 0.625% spread on the 5/1 to 7/1 ARMs vs 30 fixed. With a 5-7 year window, I'd take the ARM and prepay the 'savings' compared to the 30 year (assuming all tax-advantaged vehicles are filled). ROI beats 5-7 year bonds and CDs.

If you end up keeping the mortgage (not refi or sell) after 7 years, you have the choice to pay down the loan faster or slower. Remember your mortgage won't adjust in a vacuum; if mortgage rates rise so will CD and bonds yields, off setting the adjustment costs.

fishmonger
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Re: 20yr fixed, 30yr fixed, or 7/1 ARM

Post by fishmonger » Wed Apr 12, 2017 4:53 pm

beavers1505 wrote:
fishmonger wrote:
beavers1505 wrote:I would be very surprised if I were to stay in the house for longer than 5 years
I'm sure you've done the calculation, but if that's the case why are you buying to begin with? We don't have any details with the area, home prices vs. renting, but transaction costs are significant in most real estate deals
To put it in the simplest terms possible, rentals in my area are prohibitively expensive, and akin to lighting my money on fire. Due to my career, closing costs are significantly lower for me than similarly situated individuals.
Depending on your geographic market, local/national economy, specific neighborhood you buy in, specific property you buy, deferred maintenance, loss of a large local employer, etc, buying now to sell in 5 years might be lighting your money on fire as well

beavers1505
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Re: 20yr fixed, 30yr fixed, or 7/1 ARM

Post by beavers1505 » Wed Apr 12, 2017 5:00 pm

I understand the position, and I'm well versed in it. That said, I find that a lot of folks that take the rent > buy position ignore the intrinsic value of purchasing/owning (or shared ownership with the bank) one's own home. That's just me though.

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Ketawa
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Re: 20yr fixed, 30yr fixed, or 7/1 ARM

Post by Ketawa » Wed Apr 12, 2017 6:13 pm

I would use the ARM. If your plans change and you end up owning the home longer than 7 years, refinance.

Taking the 30 year fixed instead of the 20 year fixed because you would rather invest the difference isn't a good idea, because the guaranteed higher interest rate for a 30 year fixed applies to a much larger balance than you would possibly earn by investing the difference in payment in something with a guaranteed return. Here is an example: Borrow 30-Year and Invest The Difference. If you would invest the difference in a non-guaranteed investment, you can do that by simply having a larger allocation to stocks and the 20 year loan.

In my opinion, buying over a short time horizon can make sense if you keep transaction costs low and have a low rate mortgage. I am planning to buy with a 3 year horizon in my next duty station. If I can pay basically zero closing costs and have a mortgage around 3%, it's approximately even with renting if home prices are flat. I lose if home prices fall, and I win if they rise or I stay longer than 3 years. However, this is particular to my circumstances and market

beavers1505
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Re: 20yr fixed, 30yr fixed, or 7/1 ARM

Post by beavers1505 » Thu Apr 13, 2017 8:53 am

ARM sounds great, but current state of the market gives me serious pause. It's hard enough to predict the future re: being in the house for >7 years. It's harder to predict what the rates are going to do between now and then.

For what it's worth, I'm also currently considering holding onto this house at the time of sale and renting it. How would that affect your advice?

DVMResident
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Re: 20yr fixed, 30yr fixed, or 7/1 ARM

Post by DVMResident » Thu Apr 13, 2017 10:10 am

beavers1505 wrote:ARM sounds great, but current state of the market gives me serious pause. It's hard enough to predict the future re: being in the house for >7 years. It's harder to predict what the rates are going to do between now and then.
Who cares what interest rates do? ARM adjustments don't matter on two fronts:

(1) If you've been paying the 'savings' of the ARM over the fixed 30 year, your principal is lower --> less interest. Also, if it's difficult from a cash-flow perspective (you said it wasn't in the OP), stop the extra payments. Monthly cash-flows stay similar (plus another 5 or 7 years of inflation decaying costs in real dollars by another 7~15%).

(2) If interest rates raise, your savings accounts, bonds, and CDs all have higher yields. You benefited from those higher yields for 5 or 7 years of the fixed phase ('index' phase in ARM lingo) to the adjustment, neutralizing the adjustment costs (either partially or fully). Rising rates is a good thing for savers.
considering holding onto this house at the time of sale and renting it. How would that affect your advice?
I'm a small time landlord. Actually, I like ARMs for primary home turned rental because of the tax structure: less interest during the primary years phase (most home owners benefit very little from interest deductions over standard deductions), more future interest (now a rental cost) to offset rent. There is a tax advantage to this sequence. Do a dummy tax return to see the effect.

Also, read the mortgage paperwork carefully and pay attention to any wording around being owner occupied. Generally not an issue, but just something to look for.
Last edited by DVMResident on Thu Apr 13, 2017 12:51 pm, edited 2 times in total.

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greg24
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Re: 20yr fixed, 30yr fixed, or 7/1 ARM

Post by greg24 » Thu Apr 13, 2017 10:16 am

Ketawa wrote:Taking the 30 year fixed instead of the 20 year fixed because you would rather invest the difference isn't a good idea, because the guaranteed higher interest rate for a 30 year fixed applies to a much larger balance than you would possibly earn by investing the difference in payment in something with a guaranteed return. Here is an example: Borrow 30-Year and Invest The Difference. If you would invest the difference in a non-guaranteed investment, you can do that by simply having a larger allocation to stocks and the 20 year loan.
+1. This is a great link, be sure to read it. Very illuminating on the 30 vs. 20 year decision.

beavers1505
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Re: 20yr fixed, 30yr fixed, or 7/1 ARM

Post by beavers1505 » Thu Apr 13, 2017 10:46 am

So, correct me if I'm wrong, but what I'm gathering from you all is that my wisest decision would be to either a.) take the 20 year and pay the higher note, or b.) take the 7/1 ARM and make the higher payment.

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jimb_fromATL
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Re: 20yr fixed, 30yr fixed, or 7/1 ARM

Post by jimb_fromATL » Thu Apr 13, 2017 1:04 pm

Ketawa wrote:I would use the ARM. If your plans change and you end up owning the home longer than 7 years, refinance.

Taking the 30 year fixed instead of the 20 year fixed because you would rather invest the difference isn't a good idea, because the guaranteed higher interest rate for a 30 year fixed applies to a much larger balance than you would possibly earn by investing the difference in payment in something with a guaranteed return. Here is an example: Borrow 30-Year and Invest The Difference. If you would invest the difference in a non-guaranteed investment, you can do that by simply having a larger allocation to stocks and the 20 year loan.


To put it in perspective for the OP:
  • The payment on $232,614 at 4.25% for 30 years is $1144.32 per month.
    The payment on $232,614 at 3.875% for 20 years is $1394.32 per month.

    If the homeowner takes the 20 year mortgage at perhaps 3.875% the payment will be $250.00 per month higher than the 30 year loan at 4.25%.

    After 20. years the balance on the 30 year loan will still be $111,709. So to break even, investing the $250 will need to earn enough to give a net after tax of $111,709 in order to offset the mortgage balance and have the same net worth at that time.

    Assuming cap gains taxes at 15% federal and 6% state on 2% dividends paid out of earnings every year with remaining dividends reinvested, the investment in a taxable account would need to earn an average APY of about 6.35% to give the same net result after taxes at the end of 20 years.
I don't know of anywhere you can put the extra money to get a return that high, absolutely guaranteed with no risk to the principal.

jimb
Last edited by jimb_fromATL on Thu Apr 13, 2017 1:40 pm, edited 1 time in total.

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greg24
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Re: 20yr fixed, 30yr fixed, or 7/1 ARM

Post by greg24 » Thu Apr 13, 2017 1:13 pm

beavers1505 wrote:So, correct me if I'm wrong, but what I'm gathering from you all is that my wisest decision would be to either a.) take the 20 year and pay the higher note, or b.) take the 7/1 ARM and make the higher payment.
I would take the 20 year.

WhiteMaxima
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Re: 20yr fixed, 30yr fixed, or 7/1 ARM

Post by WhiteMaxima » Thu Apr 13, 2017 1:21 pm

7 Year Arm is better than fixed if you stay for 10 years. The interest may or may not go up. The adjustment of rate after 7 years has a cap.

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Re: 20yr fixed, 30yr fixed, or 7/1 ARM

Post by an_asker » Thu Apr 13, 2017 1:23 pm

beavers1505 wrote:So, correct me if I'm wrong, but what I'm gathering from you all is that my wisest decision would be to either a.) take the 20 year and pay the higher note, or b.) take the 7/1 ARM and make the higher payment.
Did you come back and post about the rate on the 7/1 ARM? I don't think I saw it.

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Re: 20yr fixed, 30yr fixed, or 7/1 ARM

Post by Alto Astral » Thu Apr 13, 2017 1:41 pm

I my case I needed to pick between 15 and 30 year. I picked 30 and started making payments towards principal. That way if all went well, I would have paid it off in 15 years. The flexibility helped since I decided to py the minimum and instead shore up via investmens so I have more options with kids college/unemployment etc

beavers1505
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Re: 20yr fixed, 30yr fixed, or 7/1 ARM

Post by beavers1505 » Thu Apr 13, 2017 2:25 pm

an_asker wrote:
beavers1505 wrote:So, correct me if I'm wrong, but what I'm gathering from you all is that my wisest decision would be to either a.) take the 20 year and pay the higher note, or b.) take the 7/1 ARM and make the higher payment.
Did you come back and post about the rate on the 7/1 ARM? I don't think I saw it.
Not yet. I'll have it by the end of the day and will post.

@jimb, you're suggesting that I should take the 20-year over the 7/1?

Also, this may sound stupid, but I need to wrap my head around it. When you guys define the lack of interest paid as a "return," you're using the idea that "money saved is money earned," correct? Obviously my payments aren't affirmatively returning me anything other than savings.

Again, can't thank you all enough for the advice.

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Re: 20yr fixed, 30yr fixed, or 7/1 ARM

Post by KATNYC » Thu Apr 13, 2017 3:10 pm

Ketawa wrote:I would use the ARM. If your plans change and you end up owning the home longer than 7 years, refinance.

Taking the 30 year fixed instead of the 20 year fixed because you would rather invest the difference isn't a good idea, because the guaranteed higher interest rate for a 30 year fixed applies to a much larger balance than you would possibly earn by investing the difference in payment in something with a guaranteed return. Here is an example: Borrow 30-Year and Invest The Difference. If you would invest the difference in a non-guaranteed investment, you can do that by simply having a larger allocation to stocks and the 20 year loan.

In my opinion, buying over a short time horizon can make sense if you keep transaction costs low and have a low rate mortgage. I am planning to buy with a 3 year horizon in my next duty station. If I can pay basically zero closing costs and have a mortgage around 3%, it's approximately even with renting if home prices are flat. I lose if home prices fall, and I win if they rise or I stay longer than 3 years. However, this is particular to my circumstances and market
Great link! https://thefinancebuff.com/borrow-30-ye ... rence.html
Thanks for posting. I appreciate reading articles like this from people who run the numbers.
We've already decided on a 10/1ARM, forever home, and with our lump sum payments after closing, we will be on track to pay it off in 9 years.

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Re: 20yr fixed, 30yr fixed, or 7/1 ARM

Post by beavers1505 » Thu Apr 13, 2017 3:36 pm

I'd also note that some of the assumptions in these articles involve me investing whatever would be leftover in tax-inefficient accounts. If I were to take the 30 year mortgage and invest the difference in something tax advantaged, or something like real estate, would the analysis not favor the 30 year?

beavers1505
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Re: 20yr fixed, 30yr fixed, or 7/1 ARM

Post by beavers1505 » Thu Apr 13, 2017 11:51 pm

Alright folks, so here are my numbers:

7/1 ARM: 3.375% with a 5% immediate adjustment cap (and 5% lifetime) when the lock expires.
30 year fixed: 4.125%
20 year fixed: 3.875%

The 30 year fixed is also available at 4.25% with a $2000 lender credit, ARM is available at 3.625 with a $1700 credit, and the 20 year is available at 4.125% with a $2000 credit. This would equate to $1262/mo total (including taxes and insurance).

As it sits, I think I'm going to take the 7/1 ARM at 3.375% and pay the amount of the 30 year fixed at 4.125, which would be about $1340/mo, which would equate to about 13% of our gross monthly income. If it works out that I hold onto the house and rent it, I'll likely do some sort of refinancing anyway to liquidate at least some of equity out to put towards some other type of investment - be it real estate or market based.

It seems like the best decision for us, and I'd rather take the lower rate over the immediate lender credit. I'd like to keep as much cash on hand as possible, but I think the lower rate is worth taking no credit.

Thoughts on all of the above?

I'd also like to reiterate my gratitude for all of the insight. This is the first "major" financial decision we've been faced with, and I'm trying to ascertain that all of my bases are covered and I'm making the best decision for us possible.

KATNYC
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Re: 20yr fixed, 30yr fixed, or 7/1 ARM

Post by KATNYC » Fri Apr 14, 2017 12:21 am

What does this mean?
"7/1 ARM: 3.375% with a 5% immediate adjustment cap (and 5% lifetime) when the lock expires."

If I understand ARM's correctly, the 3.375% rate is already fixed for 7 years so does 5% immediate adjustment cap mean 5% cap if the rate changes prior to closing?

beavers1505
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Re: 20yr fixed, 30yr fixed, or 7/1 ARM

Post by beavers1505 » Fri Apr 14, 2017 12:31 am

Once the 7 year lock in expires, the rate adjusts. My potential ARM has an initial rate cap of 5%, a periodic cap of 2%, and a lifetime cap of 5%. There is an immediate rate adjustment cap of 5%, but also a lifetime rate cap of 5%. This means that as soon as the lock in expires, the rate can adjust upwards (or downwards) up to 5%. The lifetime cap means that over the entire term of the loan (30 years), the rate will never adjust more than 5% of the original rate. So, for example, if my rate immediately adjusted at the end of my 7 year lock in upwards of 5%, it could never adjust higher than that 5%. However, if it were to adjust 2% immediately, it could potentially adjust 1-2% further upwards in following years, all the way up to 5% greater than the original rate...if that makes sense.

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sunny_socal
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Re: 20yr fixed, 30yr fixed, or 7/1 ARM

Post by sunny_socal » Fri Apr 14, 2017 12:58 am

I'd go for the 20 because I don't have a crystal ball yet I sense a crash coming.

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Re: 20yr fixed, 30yr fixed, or 7/1 ARM

Post by German Expat » Fri Apr 14, 2017 2:49 am

Did you also look at things like a 5/5 ARM from e.g. Penfed or Navy Federal? There each adjustment is capped at 2% with a life time cap of 5%. Also the rates are a bit lower and if your target range is 5 years it would match. Worst case you get a 2% adjustment for another 5 years.

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unclescrooge
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Re: 20yr fixed, 30yr fixed, or 7/1 ARM

Post by unclescrooge » Fri Apr 14, 2017 3:31 am

beavers1505 wrote:Hi all. I'm a first time home buyer and I have some mortgage questions.

With 20% down, I can get a 30yr at 4.125%, or a 20 year at 3.875%. T difference in the monthly payments is about $250. I can afford either without issue, but I'd rather take the extra $250 and invest it elsewhere. Am I making the right decision going with the 30? I don't plan to stay in the home longer than 5-7 years, so I am also going to get some numbers on a 7/1 ARM tomorrow.

With the above rates, my monthly payments would equate to the following percentages of my monthly (gross/before tax) income:

30yr - 10%
20yr - 12%

I'm currently inclined to take the 30 year, but would like some input from the wise folks here. Thanks!
On my first purchase I went with a 30 year at 8.125%. Now I'm about to refi my fourth personal residence with a mortgage that is 10x bigger and I'm comfortable taking on a 7/1 ARM at 2.7%.

I could drive a BMW with difference between the 7 year and the 30 year. I presume we'll see a recession sometime inn the next 7 years, so I'm refinance again at that point.

There's no right answer here.

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Re: 20yr fixed, 30yr fixed, or 7/1 ARM

Post by unclescrooge » Fri Apr 14, 2017 3:34 am

German Expat wrote:Did you also look at things like a 5/5 ARM from e.g. Penfed or Navy Federal? There each adjustment is capped at 2% with a life time cap of 5%. Also the rates are a bit lower and if your target range is 5 years it would match. Worst case you get a 2% adjustment for another 5 years.
I'm no loan officer, but I am in the process of refinancing.

Rates on the 5 year might currently the same as the 7 year. Most ARMs have a gradual adjustment once they reset.

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Re: 20yr fixed, 30yr fixed, or 7/1 ARM

Post by Bud » Fri Apr 14, 2017 4:44 am

Simple answer - without more details, a 20 year loan is the best purchase point. The interest rate is lower, the payments not too much higher, the time horizon more realistic if you do stay longer for some reason but the pay down is better if you do cash out after 5 years.

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Re: 20yr fixed, 30yr fixed, or 7/1 ARM

Post by sunny_socal » Fri Apr 14, 2017 7:44 am

Bud wrote:Simple answer - without more details, a 20 year loan is the best purchase point. The interest rate is lower, the payments not too much higher, the time horizon more realistic if you do stay longer for some reason but the pay down is better if you do cash out after 5 years.
Exactly.

I'm happy with my 2.625 15-year! :beer If I'd gone with an ARM, I'd be worry about the end point, refi likely not very attractive in the future. A bird in the hand...

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Re: 20yr fixed, 30yr fixed, or 7/1 ARM

Post by yatesd » Fri Apr 14, 2017 8:05 am

I'd also want to see how a 10/1 ARM rate compares to 7/1.

I also agree that you should choose an ARM that only changes a maximum of 2% a year. Stay away from a 5% initial change (never heard of that one)!

7/1- worse case rates go up 2% @ year 8, and 4% @ year 9.

10/1- worse case rates go up 2% @ year 11, and 4% @ year 12.

This will give you an additional safety net and the interest rate savings should be substantial enough to provide a benefit. I prefer ARM's with initial years locked in, because there are so many variables...will you move?, will rates go down?, will you stay (and never refinance)?

http://www.freddiemac.com/finance/refi_archives.html

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Re: 20yr fixed, 30yr fixed, or 7/1 ARM

Post by an_asker » Fri Apr 14, 2017 9:28 am

beavers1505 wrote:Alright folks, so here are my numbers:

7/1 ARM: 3.375% with a 5% immediate adjustment cap (and 5% lifetime) when the lock expires.
30 year fixed: 4.125%
20 year fixed: 3.875%

The 30 year fixed is also available at 4.25% with a $2000 lender credit, ARM is available at 3.625 with a $1700 credit, and the 20 year is available at 4.125% with a $2000 credit. This would equate to $1262/mo total (including taxes and insurance).

As it sits, I think I'm going to take the 7/1 ARM at 3.375% and pay the amount of the 30 year fixed at 4.125, which would be about $1340/mo, which would equate to about 13% of our gross monthly income. If it works out that I hold onto the house and rent it, I'll likely do some sort of refinancing anyway to liquidate at least some of equity out to put towards some other type of investment - be it real estate or market based.

It seems like the best decision for us, and I'd rather take the lower rate over the immediate lender credit. I'd like to keep as much cash on hand as possible, but I think the lower rate is worth taking no credit.

Thoughts on all of the above?

I'd also like to reiterate my gratitude for all of the insight. This is the first "major" financial decision we've been faced with, and I'm trying to ascertain that all of my bases are covered and I'm making the best decision for us possible.
In your position, if I could afford to (based on the numbers I think I saw, you can), I would take the 7/1 ARM and make payments equivalent to that 20-year fixed at 3.875%. Applying the difference to the principal, of course!

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Re: 20yr fixed, 30yr fixed, or 7/1 ARM

Post by DVMResident » Fri Apr 14, 2017 10:12 am

an_asker wrote:
beavers1505 wrote:Alright folks, so here are my numbers:

7/1 ARM: 3.375% with a 5% immediate adjustment cap (and 5% lifetime) when the lock expires.
30 year fixed: 4.125%
20 year fixed: 3.875%

The 30 year fixed is also available at 4.25% with a $2000 lender credit, ARM is available at 3.625 with a $1700 credit, and the 20 year is available at 4.125% with a $2000 credit. This would equate to $1262/mo total (including taxes and insurance).

As it sits, I think I'm going to take the 7/1 ARM at 3.375% and pay the amount of the 30 year fixed at 4.125, which would be about $1340/mo, which would equate to about 13% of our gross monthly income. If it works out that I hold onto the house and rent it, I'll likely do some sort of refinancing anyway to liquidate at least some of equity out to put towards some other type of investment - be it real estate or market based.

It seems like the best decision for us, and I'd rather take the lower rate over the immediate lender credit. I'd like to keep as much cash on hand as possible, but I think the lower rate is worth taking no credit.

Thoughts on all of the above?

I'd also like to reiterate my gratitude for all of the insight. This is the first "major" financial decision we've been faced with, and I'm trying to ascertain that all of my bases are covered and I'm making the best decision for us possible.
In your position, if I could afford to (based on the numbers I think I saw, you can), I would take the 7/1 ARM and make payments equivalent to that 20-year fixed at 3.875%. Applying the difference to the principal, of course!
+1 same vote here. The 0.75% spread on the 7/1 lower interest is very attractive and better than the 20 year. Extra payments to take advantage of the cheap years.

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Re: 20yr fixed, 30yr fixed, or 7/1 ARM

Post by KATNYC » Fri Apr 14, 2017 10:13 am

beavers1505 wrote:Once the 7 year lock in expires, the rate adjusts. My potential ARM has an initial rate cap of 5%, a periodic cap of 2%, and a lifetime cap of 5%. There is an immediate rate adjustment cap of 5%, but also a lifetime rate cap of 5%. This means that as soon as the lock in expires, the rate can adjust upwards (or downwards) up to 5%. The lifetime cap means that over the entire term of the loan (30 years), the rate will never adjust more than 5% of the original rate. So, for example, if my rate immediately adjusted at the end of my 7 year lock in upwards of 5%, it could never adjust higher than that 5%. However, if it were to adjust 2% immediately, it could potentially adjust 1-2% further upwards in following years, all the way up to 5% greater than the original rate...if that makes sense.

Thanks! We are just getting to understand ARM loans (never had one) since we are about to get a 10/1 ARM at 3.5%, but it will be paid off in 9 years or less. We are considering the 7/1 ARM as well given our lump sum options and early payment plan. Not yet decided. For the 10/1 ARM, we need to make lump sum payments and extra payments until April 2018 to put us on track to pay off prior to the lock expiration. The 401K waiting period for a new job is up April 2018 so we can contribute in May 2018 by diverting those funds to the 401K.

For the 7/1 ARM, we need to make lump sum payments and extra payments until October 2019 to put us on track to pay off prior to the lock expiration. This is in addition to fully funding the second 401K.

We may have a child in the next 2 years as well, so we will likely go with the 10/1 so as not to strain the budget.

$1,297.87 15yr 3.625%; 3.76 APR
$885.49 30 yr 4.25%; 4.328 APR
$783.37 5/1 ARM 3.25%; 3.806 APR
$795.77 7/1 ARM 3.375% 3.78 APR
$808.28 10/1 ARM 3.5% 3.767 APR
$846.43 15/1 ARM 3.875% 3.976 APR

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Re: 20yr fixed, 30yr fixed, or 7/1 ARM

Post by beavers1505 » Mon Apr 17, 2017 9:05 am

In your position, if I could afford to (based on the numbers I think I saw, you can), I would take the 7/1 ARM and make payments equivalent to that 20-year fixed at 3.875%. Applying the difference to the principal, of course!
The 7/1 ARM payment is $1248/mo. The 20 year at 3.875% is $1583/mo. I think we're going to take the 7/1 ARM, and pay $1400/mo, which is between the 20 year and the 30 year payments. The difference will be applied to principal.

That will still give me some flexibility going forward, as I'm trying to get into real estate investing as well and any savings is helpful.

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Re: 20yr fixed, 30yr fixed, or 7/1 ARM

Post by an_asker » Mon Apr 17, 2017 9:10 am

beavers1505 wrote:
In your position, if I could afford to (based on the numbers I think I saw, you can), I would take the 7/1 ARM and make payments equivalent to that 20-year fixed at 3.875%. Applying the difference to the principal, of course!
The 7/1 ARM payment is $1248/mo. The 20 year at 3.875% is $1583/mo. I think we're going to take the 7/1 ARM, and pay $1400/mo, which is between the 20 year and the 30 year payments. The difference will be applied to principal.

That will still give me some flexibility going forward, as I'm trying to get into real estate investing as well and any savings is helpful.
Sounds good to me.

The only argument against it that you might need to think about is if you might plan to keep the property as a rental after you move out (within seven years like you think you will). In that situation, it might be a better idea to go with a fixed loan (20-year or 30-year) instead of the ARM. You will be hard pressed to find a fixed loan for a rental property that would be anywhere close to what you would get for a primary residence.

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Re: 20yr fixed, 30yr fixed, or 7/1 ARM

Post by an_asker » Mon Apr 17, 2017 9:14 am

KATNYC wrote:[...]Thanks! We are just getting to understand ARM loans (never had one) since we are about to get a 10/1 ARM at 3.5%, but it will be paid off in 9 years or less. We are considering the 7/1 ARM as well given our lump sum options and early payment plan. Not yet decided. For the 10/1 ARM, we need to make lump sum payments and extra payments until April 2018 to put us on track to pay off prior to the lock expiration. The 401K waiting period for a new job is up April 2018 so we can contribute in May 2018 by diverting those funds to the 401K.

For the 7/1 ARM, we need to make lump sum payments and extra payments until October 2019 to put us on track to pay off prior to the lock expiration. This is in addition to fully funding the second 401K.

We may have a child in the next 2 years as well, so we will likely go with the 10/1 so as not to strain the budget.

$1,297.87 15yr 3.625%; 3.76 APR
$885.49 30 yr 4.25%; 4.328 APR
$783.37 5/1 ARM 3.25%; 3.806 APR
$795.77 7/1 ARM 3.375% 3.78 APR
$808.28 10/1 ARM 3.5% 3.767 APR
$846.43 15/1 ARM 3.875% 3.976 APR
I don't understand what you are saying about lump sum options and payment plan. You should be able to make any payments towards the principal with your ARM loan (or fixed interest loan) whenever you want to.

It might be a better idea to go with the lower rate 7/1 ARM, all other things (closing costs) being equal. But either way, the difference is not a lot between that and the 10/1 ARM, like you say.

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Re: 20yr fixed, 30yr fixed, or 7/1 ARM

Post by DVMResident » Mon Apr 17, 2017 9:53 am

an_asker wrote:The only argument against it that you might need to think about is if you might plan to keep the property as a rental after you move out (within seven years like you think you will). In that situation, it might be a better idea to go with a fixed loan (20-year or 30-year) instead of the ARM. You will be hard pressed to find a fixed loan for a rental property that would be anywhere close to what you would get for a primary residence.
I made the opposite argument from a tax perspective: an ARM that adjusts up will shift the interest from the early years to later years. To take advantage of the mortgage interest deduction, you have to itemize. A $280k loan ARM @ 3.375% 30 yrs interest for the first year will only by $9.2k. Thus, standard deduction-generally a good thing (no reason to spend money in lieu of taking the freebie). Shifting to the 30 yr fixed @ 4.125%, interest hits $11k the first year, only breaking the standard deduction by ~$2k if single of none if married (not mentioned by OP).

In the rental years, you can deduct the interest as an expense. This helps offsets the rent income.

For primary residences turned rentals, the tax system incentive you to shift interest from the primary residence years to the rental years. ARM fit the bill nicely.

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Re: 20yr fixed, 30yr fixed, or 7/1 ARM

Post by beavers1505 » Mon Apr 17, 2017 10:13 am

DVMResident wrote:
an_asker wrote:The only argument against it that you might need to think about is if you might plan to keep the property as a rental after you move out (within seven years like you think you will). In that situation, it might be a better idea to go with a fixed loan (20-year or 30-year) instead of the ARM. You will be hard pressed to find a fixed loan for a rental property that would be anywhere close to what you would get for a primary residence.
I made the opposite argument from a tax perspective: an ARM that adjusts up will shift the interest from the early years to later years. To take advantage of the mortgage interest deduction, you have to itemize. A $280k loan ARM @ 3.375% 30 yrs interest for the first year will only by $9.2k. Thus, standard deduction-generally a good thing (no reason to spend money in lieu of taking the freebie). Shifting to the 30 yr fixed @ 4.125%, interest hits $11k the first year, only breaking the standard deduction by ~$2k if single of none if married (not mentioned by OP).

In the rental years, you can deduct the interest as an expense. This helps offsets the rent income.

For primary residences turned rentals, the tax system incentive you to shift interest from the primary residence years to the rental years. ARM fit the bill nicely.
Thanks for the post. Interesting perspective that I hadn't previously thought about. Not married, FWIW.

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Re: 20yr fixed, 30yr fixed, or 7/1 ARM

Post by jimb_fromATL » Mon Apr 17, 2017 3:24 pm

beavers1505 wrote:Alright folks, so here are my numbers:

7/1 ARM: 3.375% with a 5% immediate adjustment cap (and 5% lifetime) when the lock expires.
30 year fixed: 4.125%
20 year fixed: 3.875%

The 30 year fixed is also available at 4.25% with a $2000 lender credit, ARM is available at 3.625 with a $1700 credit, and the 20 year is available at 4.125% with a $2000 credit. This would equate to $1262/mo total (including taxes and insurance).

As it sits, I think I'm going to take the 7/1 ARM at 3.375% and pay the amount of the 30 year fixed at 4.125, which would be about $1340/mo, which would equate to about 13% of our gross monthly income. If it works out that I hold onto the house and rent it, I'll likely do some sort of refinancing anyway to liquidate at least some of equity out to put towards some other type of investment - be it real estate or market based.

It seems like the best decision for us, and I'd rather take the lower rate over the immediate lender credit. I'd like to keep as much cash on hand as possible, but I think the lower rate is worth taking no credit.

Thoughts on all of the above?

I'd also like to reiterate my gratitude for all of the insight. This is the first "major" financial decision we've been faced with, and I'm trying to ascertain that all of my bases are covered and I'm making the best decision for us possible.
Need to know how much cash is required at closing for each loan, and the balance initially finance and payment fpr P&I alone for each one.

Unless you have more room to invest in a tax-deferred retirement account, it's a pretty sure thing that you cannot beat the return for paying any extra money you have on the mortgage.

But this also applies to the cash up front at closing. For instance, if you would have to pay $4,000 in closing costs on one loan but get a credit for $2000 on another, then you should compare paying the $2000 difference on the first loan. And you should compare your debt worth in the form or more equity (less debt) at any point in the future for making the same (highest) payment on each loan.

So ... need to know the closing costs and actual amount out of pocket for each loan, and the payment fro P&I alone.

Also ... you should not consider prepaid items like taxes and insurance in the initial amount at closing, or in comparing the paymetns since that should be the same regardless of which loan you take -- and you'd need to set it aside even if you had no mortgage at all..

At today's still low mortgage rates, that 5% first cap on the first adjustment sounds like a ticking financial time bomb to me. I've seen folks discuss lots of loans that had a cap of more typically 2% for the first and each subsequent adjustment.

Got details?

jimb

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Re: 20yr fixed, 30yr fixed, or 7/1 ARM

Post by beavers1505 » Mon Apr 17, 2017 4:27 pm

jimb_fromATL wrote: Need to know how much cash is required at closing for each loan, and the balance initially finance and payment fpr P&I alone for each one.

Unless you have more room to invest in a tax-deferred retirement account, it's a pretty sure thing that you cannot beat the return for paying any extra money you have on the mortgage.

But this also applies to the cash up front at closing. For instance, if you would have to pay $4,000 in closing costs on one loan but get a credit for $2000 on another, then you should compare paying the $2000 difference on the first loan. And you should compare your debt worth in the form or more equity (less debt) at any point in the future for making the same (highest) payment on each loan.

So ... need to know the closing costs and actual amount out of pocket for each loan, and the payment fro P&I alone.

Also ... you should not consider prepaid items like taxes and insurance in the initial amount at closing, or in comparing the paymetns since that should be the same regardless of which loan you take -- and you'd need to set it aside even if you had no mortgage at all..

At today's still low mortgage rates, that 5% first cap on the first adjustment sounds like a ticking financial time bomb to me. I've seen folks discuss lots of loans that had a cap of more typically 2% for the first and each subsequent adjustment.

Got details?

jimb
I can give you all of the details I have at the moment. We're between two lenders right now. Down payment exclusive of closing costs is $53,380.00.

Lender A:

30 year CONV:
4.125% with a $5000 credit.

P&I: $1081.87

Closing costs: $4577
Prepaid Items: $3435
Credit: ($5000)
= $3012.00
Total Cash to Close: $56,393.04

7/1 ARM:
3.875% with a $5000 credit.

$1,004.05

Closing costs: $4577
Prepaid Items: $3435
Credit: ($5000)
= $3012.00
Total Cash to Close: $56,393.04

However, Lender A requires you to use their title folks in order to obtain the credit, and their title fees are substantially inflated. Realistically, the credit is more along the lines of $3600 when adjusted for the differences in title fees by closing elsewhere.

Lender B:

30 year CONV:
4.125% with no credit:

P&I: $1081.87

Closing costs: $3377
Prepaid Items: $3435
= $6812
Total Cash to Close: $60,192


7/1 ARM:

3.375% with no credit:

P&I: $943.96

Closing costs: $3377
Prepaid Items: $3435
= $6812
Total Cash to Close: $60,192

So, while Lender A gives me a substantial credit, their title fees are also substantially inflated to reflect the credit (it's really a seller credit, not a lender credit). Lender B doesn't give me a credit, but gives me the option of taking the substantially lower rate with the 7/1 ARM. To put it simply, if I go with ARM (which I'm leaning towards just because of the flexibility it would give me), I would go with Lender B. If I went with conventional, I'd obviously go with Lender A. I don't have a fee sheet on the 20 year fixed, because at the moment it's off the table for us. I don't like the idea of being locked in to the higher payment, when I could take the 7/1 and make some higher payment regardless. Let me know if you need some more details Jimb, and I'll see what I can do.

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Re: 20yr fixed, 30yr fixed, or 7/1 ARM

Post by jimb_fromATL » Wed Apr 19, 2017 7:51 am

beavers1505 wrote: .... Down payment exclusive of closing costs is $53,380.00.

Lender A:

30 year CONV:
4.125% with a $5000 credit.
P&I: $1081.87

7/1 ARM:
3.875% with a $5000 credit.
[P&I] $1,004.05


Lender B:

30 year CONV:
4.125% with no credit:
P&I: $1081.87

7/1 ARM:
3.375% with no credit:
P&I: $943.96
:confused This does not appear to be an apples to apples comparison. It appears that you're paying a lot more down for the 7/1 ARM. How much are you actually paying for the home? How much down for each loan?
  • For lender A:
    If the payment at 4.125% for 30 years is $1081.87 then the balance financed is $223,227.19.
    But if the payment at 3.875% for 30 years is $1004.05 per month then the balance financed is $213,519.95.

    Lender B:
    If the payment at 4.125% for 30 years is $1081.87 then the balance financed is $223,227.19.
    But if the payment on the 7/1 ARM at 3.375% for 30 years Is 943.96 then the balance must be $213,519.13.
    • =PV(3.375%/12, 360, -943.96) = $213,519.13
So it appears that you must be paying about $9707 more down for the 7/1 ARM.

For a fair comparison, you need to compare the fixed versus ARM for the same amount down and same balance financed. (And look at the net results for making the same cash at closing and same payment per month for P&I on each loan.)

For the same $223,227 balance, the payment for P&I at 3.375% on the ARM with lender B would be $986.88.

With the extra $9707 down on the fixed rate mortgage, the payment on $213,520 at 4.125% for 360 months would only be $1034.82.

So there's not as much difference in exchange for the risk of having a large increase in the rate (and minimum payment) after 7 years.

jimb

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Re: 20yr fixed, 30yr fixed, or 7/1 ARM

Post by beavers1505 » Wed Apr 19, 2017 8:44 am

Sorry about that, my math was bad. The amount down is the same - $53,380. The amount financed across the board is $213,520. I should note now that that 4.125% with Lender A is off the table. The LO thought she could get down that low, but the best they can offer me now is 4.25%.

Regardless, P&I on the 4.125% would've been 1034.82. For Lender A, the P&I on the 4.25% would be $1050. So, the new, accurate numbers would look like this:

Lender A:

30 year CONV:
4.25% with a $5000 credit.

P&I: $1050

Closing costs: $4577
Prepaid Items: $3435
Credit: ($5000)
= $3012.00
Total Cash to Close: $56,393.04

7/1 ARM:
3.875% with a $5000 credit.

$1,004.05

Closing costs: $4577
Prepaid Items: $3435
Credit: ($5000)
= $3012.00
Total Cash to Close: $56,393.04

However, Lender A requires you to use their title folks in order to obtain the credit, and their title fees are substantially inflated. Realistically, the credit is more along the lines of $3600 when adjusted for the differences in title fees by closing elsewhere.

Lender B:

30 year CONV:
4.125% with no credit:

P&I: $1034.82

Closing costs: $3377
Prepaid Items: $3435
= $6812
Total Cash to Close: $60,192


7/1 ARM:
3.375% with no credit:

P&I: $943.96

Closing costs: $3377
Prepaid Items: $3435
= $6812
Total Cash to Close: $60,192

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Re: 20yr fixed, 30yr fixed, or 7/1 ARM

Post by KATNYC » Wed Apr 19, 2017 2:07 pm

an_asker wrote:
KATNYC wrote:[...]Thanks! We are just getting to understand ARM loans (never had one) since we are about to get a 10/1 ARM at 3.5%, but it will be paid off in 9 years or less. We are considering the 7/1 ARM as well given our lump sum options and early payment plan. Not yet decided. For the 10/1 ARM, we need to make lump sum payments and extra payments until April 2018 to put us on track to pay off prior to the lock expiration. The 401K waiting period for a new job is up April 2018 so we can contribute in May 2018 by diverting those funds to the 401K.

For the 7/1 ARM, we need to make lump sum payments and extra payments until October 2019 to put us on track to pay off prior to the lock expiration. This is in addition to fully funding the second 401K.

We may have a child in the next 2 years as well, so we will likely go with the 10/1 so as not to strain the budget.

$1,297.87 15yr 3.625%; 3.76 APR
$885.49 30 yr 4.25%; 4.328 APR
$783.37 5/1 ARM 3.25%; 3.806 APR
$795.77 7/1 ARM 3.375% 3.78 APR
$808.28 10/1 ARM 3.5% 3.767 APR
$846.43 15/1 ARM 3.875% 3.976 APR
I don't understand what you are saying about lump sum options and payment plan. You should be able to make any payments towards the principal with your ARM loan (or fixed interest loan) whenever you want to.

It might be a better idea to go with the lower rate 7/1 ARM, all other things (closing costs) being equal. But either way, the difference is not a lot between that and the 10/1 ARM, like you say.
We ended up going with TD Bank. Got the conditional approval by email. They got us a 10/1 ARM at $795.77 3.375% 3.78 APR to make up for their higher estimated closing costs as compared to other banks.

We will make a lump sum payment and extra payments through April 2018. That puts us on track for a 9 year payoff so we can divert extra payments to 401k in May 2018 and a baby fund.

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