3/3 ARM vs 5/5 ARM Decision Analysis

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snackdog
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3/3 ARM vs 5/5 ARM Decision Analysis

Post by snackdog » Sat Mar 10, 2018 7:58 pm

We are contemplating buying a house (versus renting so let's leave renting out of the argument for now) and forecasting a range of living periods.

Short case - 3 years assuming I move to another job location or retire 25% chance
Mid case - 5 years 50% chance
Long case - 8 years is worst case to finish career in one location and retire. 25% chance

Assuming alternatives are:
3/3 ARM 30 yr 3.5% jumps to 4.5% years 4-6, 5.5% years 7-8
5/5 ARM 30 yr 3.625% jumps to 4.5% years 6-8

Every way I calculate it (total interest paid, probablistic interest paid, NPV of payments) the 3/3 is a better deal by only by a small margin.

Any other thoughts or suggestions?

Thanks

Silk McCue
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Re: 3/3 ARM vs 5/5 ARM Decision Analysis

Post by Silk McCue » Sat Mar 10, 2018 8:22 pm

Where do the purchase costs and subsequent sales costs fit into your financial analysis.

DVMResident
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Re: 3/3 ARM vs 5/5 ARM Decision Analysis

Post by DVMResident » Sat Mar 10, 2018 8:39 pm

Love the calculating the range of possibilities.

What are you doing with savings?
Going to principle? Investing (taxable, tax advantaged accounts)?

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snackdog
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Re: 3/3 ARM vs 5/5 ARM Decision Analysis

Post by snackdog » Sat Mar 10, 2018 8:50 pm

Silk McCue wrote:
Sat Mar 10, 2018 8:22 pm
Where do the purchase costs and subsequent sales costs fit into your financial analysis.
My employer will cover those.

ryman554
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Re: 3/3 ARM vs 5/5 ARM Decision Analysis

Post by ryman554 » Sun Mar 11, 2018 4:49 am

snackdog wrote:
Sat Mar 10, 2018 8:50 pm
Silk McCue wrote:
Sat Mar 10, 2018 8:22 pm
Where do the purchase costs and subsequent sales costs fit into your financial analysis.
My employer will cover those.
You sure, or at least you sure you want a motivated seller to sell your house or a motivated buyer to buy the next house you live in and will have to pay for?

Employers are notoriously horrid at getting you a good deal on things like this. I think considering the various ARM strategies is missing the bigger picture.

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snackdog
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Re: 3/3 ARM vs 5/5 ARM Decision Analysis

Post by snackdog » Sun Mar 11, 2018 8:10 am

ryman554 wrote:
Sun Mar 11, 2018 4:49 am
snackdog wrote:
Sat Mar 10, 2018 8:50 pm
Silk McCue wrote:
Sat Mar 10, 2018 8:22 pm
Where do the purchase costs and subsequent sales costs fit into your financial analysis.
My employer will cover those.
You sure, or at least you sure you want a motivated seller to sell your house or a motivated buyer to buy the next house you live in and will have to pay for?

Employers are notoriously horrid at getting you a good deal on things like this. I think considering the various ARM strategies is missing the bigger picture.
Not sure I follow your thoughts, but yes I am sure my employer will reimburse me for all reasonable costs related to purchase and sale. I have moved many times with them and it was quite easy in fact they direct pay them at closing if I used a preferred lender which is the company credit union which also offers competitive rates. This benefit is part of the reason to purchase a home even for a short stay of as little as 3 years. As long as I purchase wisely, the down side at sale is limited.

What bigger picture am I missing?

ryman554
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Re: 3/3 ARM vs 5/5 ARM Decision Analysis

Post by ryman554 » Sun Mar 11, 2018 4:05 pm

snackdog wrote:
Sun Mar 11, 2018 8:10 am
Not sure I follow your thoughts, but yes I am sure my employer will reimburse me for all reasonable costs related to purchase and sale. I have moved many times with them and it was quite easy in fact they direct pay them at closing if I used a preferred lender which is the company credit union which also offers competitive rates. This benefit is part of the reason to purchase a home even for a short stay of as little as 3 years. As long as I purchase wisely, the down side at sale is limited.

What bigger picture am I missing?
Perhaps I misunderstood... when you leave your house and go move...

1. Do you get to choose when?
2. How actually sells the house?
3. Who goes and looks to buy the house in your new area?

For situations like this, when employers "move" you... it is my impression that they are relatively inflexible on timing, want to get you to your new location as soon as possible, so "take care of" selling your old house for you. Both are not amenable to getting a good deal.

If they are truly all under your control: timing, etc... then I'll rescind my comments.

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Re: 3/3 ARM vs 5/5 ARM Decision Analysis

Post by Silk McCue » Sun Mar 11, 2018 5:18 pm

Sharing all the details, including your employers participation in the process, in the first post would have allowed folks here to spend their time usefully in trying to answer your question. As it is, it appears to have been a waste of people’s time.

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snackdog
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Re: 3/3 ARM vs 5/5 ARM Decision Analysis

Post by snackdog » Sun Mar 11, 2018 5:40 pm

ryman554 wrote:
Sun Mar 11, 2018 4:05 pm
snackdog wrote:
Sun Mar 11, 2018 8:10 am
Not sure I follow your thoughts, but yes I am sure my employer will reimburse me for all reasonable costs related to purchase and sale. I have moved many times with them and it was quite easy in fact they direct pay them at closing if I used a preferred lender which is the company credit union which also offers competitive rates. This benefit is part of the reason to purchase a home even for a short stay of as little as 3 years. As long as I purchase wisely, the down side at sale is limited.

What bigger picture am I missing?
Perhaps I misunderstood... when you leave your house and go move...

1. Do you get to choose when?
2. How actually sells the house?
3. Who goes and looks to buy the house in your new area?

For situations like this, when employers "move" you... it is my impression that they are relatively inflexible on timing, want to get you to your new location as soon as possible, so "take care of" selling your old house for you. Both are not amenable to getting a good deal.

If they are truly all under your control: timing, etc... then I'll rescind my comments.
1. I have up to a year to sell.
2. The house sells according to the normal process - a realtor lists it, offers are received, and a sale transacted.
3. I go and buy in the new area. I have up to a year to buy.

As I said, I have moved many times with my employer and have always gotten a great deal and reasonably fast sale/purchase. They even pay me a 2% premium/commission on the sales price so very happy with it all. They do try to influence the listing price so stupid sellers do not list too high and waste everyone's time. I have never had trouble with the recommended selling price (to the point I would opt out of the program).

I'm mostly interested in your views on comparing 3/3 vs 5/5 ARM 30 year mortgages.

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snackdog
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Re: 3/3 ARM vs 5/5 ARM Decision Analysis

Post by snackdog » Sun Mar 11, 2018 5:44 pm

Silk McCue wrote:
Sun Mar 11, 2018 5:18 pm
Sharing all the details, including your employers participation in the process, in the first post would have allowed folks here to spend their time usefully in trying to answer your question. As it is, it appears to have been a waste of people’s time.
You are free to waste your time as you like by delving into irrelevant details, but would prefer to focus on the mortgage comparison. My employer is not involved in the choice of which mortgage product I select. I can not see how any other detail would influence the choice of ARM length.

I am sensing may you all like to look at home sales on a very long term time scale and try to pick the best part of the decade for transactions or something. That's not me; when it is time to buy or sell I get up and go. If home prices collapse and I am underwater when it comes time to sell I will most likely take the bath (employer helps with that as well) and move on rather than waiting to see if things turn around.

Silk McCue
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Re: 3/3 ARM vs 5/5 ARM Decision Analysis

Post by Silk McCue » Sun Mar 11, 2018 5:58 pm

snackdog wrote:
Sun Mar 11, 2018 5:44 pm
If home prices collapse and I am underwater when it comes time to sell I will most likely take the bath (employer helps with that as well) and move on rather than waiting to see if things turn around.
This statement is invaluable. You don’t seem to care about financial consequences as you can clearly weather them. I assume your analysis is sound. Take the calculated small margin solution. If rates rise slower than expected then your outcome is better than expected. If rates are substantially worse than expected that probably will have an insignificant impact on your finances.

inbox788
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Re: 3/3 ARM vs 5/5 ARM Decision Analysis

Post by inbox788 » Sun Mar 11, 2018 7:40 pm

snackdog wrote:
Sat Mar 10, 2018 7:58 pm
Short case - 3 years assuming I move to another job location or retire 25% chance
Mid case - 5 years 50% chance
Long case - 8 years is worst case to finish career in one location and retire. 25% chance

Assuming alternatives are:
3/3 ARM 30 yr 3.5% jumps to 4.5% years 4-6, 5.5% years 7-8
5/5 ARM 30 yr 3.625% jumps to 4.5% years 6-8
Are the 3/3 years capped out? It's a small difference either way, and if you're on your last 5 years, the amount remaining is going to be relatively small as well and also diminishing. Furthermore, if you're so close to retirement, you should have a nice safety net you can tap if all hell breaks lose on the mortgages. So unless you can bring more certainty to any particular outcomes, you're left guessing.

Anyway, when things are this close, why not a 5/1 somewhere in between and call it a day? And if somehow the 5/1 is same as 5/5, then obviously take the extra 4 years.

scot184
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Re: 3/3 ARM vs 5/5 ARM Decision Analysis

Post by scot184 » Mon Mar 12, 2018 12:57 pm

Interesting that the lender only offers 3/3 and 5/5 ARMs, or are those the only loan programs you're considering.

Do they not offer a 5/1 ARM (http://www.thetruthaboutmortgage.com/30 ... vs-51-arm/), which might be slightly cheaper than a 5/5 ARM because it's subject to annual adjustments as opposed to the potential benefit of an every five years reset, assuming rates are favorable at that time?

Most homeowners never actually see their ARMs adjust because they either prepay, sell, or refinance before that time, but you say the five year outlook has the highest odds. And if the difference in rate is so marginal, it might provide peace of mind to go with five years, which is certainly worth something.

As noted, it might be slightly cheaper to find a 5/1 ARM to accomplish both the longer fixed term and the lower interest rate, whether it's .125% lower in rate or simply comes with fewer closing costs relative to the 5/5 ARM.

Lastly, you might be able to get the best of both worlds including an .125% better in rate and less closing costs simply by shopping around with other lenders...

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snackdog
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Re: 3/3 ARM vs 5/5 ARM Decision Analysis

Post by snackdog » Tue Mar 13, 2018 5:35 am

Good suggestions here - thanks everyone.

Bank offers a 5/1 but terms are identical to 5/5.

I can't see any reason not to choose the 3/3 as it comes out ahead in every case (3/1 is offered but identical rate and fees to 3/3)

scot184
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Re: 3/3 ARM vs 5/5 ARM Decision Analysis

Post by scot184 » Tue Mar 13, 2018 10:57 am

Is there a reason you are set on this particular bank? Have you checked to see if others are offering are a lower rate or those other programs with lower rates?

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Re: 3/3 ARM vs 5/5 ARM Decision Analysis

Post by lazydavid » Tue Mar 13, 2018 11:58 am

scot184 wrote:
Tue Mar 13, 2018 10:57 am
Is there a reason you are set on this particular bank? Have you checked to see if others are offering are a lower rate or those other programs with lower rates?
He already said it was a requirement of the relocation program, and that the rates are competitive.

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