Submitted by Bojackson63044 t3_z8ssk5 in personalfinance
Purchasing our first home and down to the final stretch with 2 mortgage options: a 7/6 ARM at 5% interest vs a 30-yr fixed at 5.375%.
My wife and I have been going back and forth about which option to choose. Take the certainty/security of a fixed rate mortgage and put up with some extra monthly payments or take the lower initial interest rate with the ARM and hope to refinance at an even lower rate if/when mortgage rates drop again?
Given what interest rates are right now on 30 year loans, 5.375% is a really good rate. I would personally rather take the fixed rate and then refi if things drop later (and you are still in the house), than gamble with an arm for a difference of 0.375%. The Fed hasn't exactly singled rates would be going down anytime soon.
Are the fees and closing costs the same between the two?
With such a small difference I'd chose the 30 year fixed if you're planning on staying there for more than 5-7 years.
At that difference and with the uncertainty around rates right now I’d take the fixed. Unless you plan to not be there for more than 7 years.
If you plan to stay longer, you’ll probably want to refinance the ARM at some point. If you take the fixed and rates drop, you can still refinance to a lower fixed rate. So either way, you will probably have a refinance in your future.
Do you mind saying where you’re getting 5.3 on a 30 year? I have a score of almost 800 and just got quoted at 6 on a 30
It’s a jumbo so that’s actually only slightly lower than the going rate.
Our is also a jumbo. But it’s still being quoted out at 6
Interesting. I’m in CA. Maybe that makes a difference? I just googled it and BoA is at 5.625% today on their public mortgage page. https://www.bankofamerica.com/mortgage/mortgage-rates/
Yes the fees and closing costs are the same.
Didn't have a jumbo but had the same situation and went with 30 year fixed because it's very close and why not go with the guarantee. Who knows what will happen in 7 years
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We have a 5/5 ARM from PenFed, which is 5 years, then reset every 5.
So I was about to say the 7/6 ARM, and then realized it's 7 with a 6 month adjustment. DO NOT DO THAT. Not for that small a savings.
30 year no question.
That just means it adjust every six months, so the adjustments could go up or down. If your 5/5 adjusted today it would skyrocket, then be stuck there for 5 years instead of going up and down with the market.
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Neither is better or worse at face value, but they will behave differently and each has positives and negatives
Most ARM's have a cap on the change. Our 5/5 is capped at a 2% increase. 5 years is a long time to plan for that and refinance if needed. 6 months is just way too volatile.
What's the difference in mortgage payments per month and what you end up paying for the life of the loan?
I personally wouldn't gamble with an arm if a fixed is less then half a percentage point
Lots of people were saying take the higher rate today and then refinance later if rates go down, but the same is true if you take the lower rate today and rates go down. You can refinance an ARM just like you can refinance a fixed.
Mortgage rates haven't been this high since the 80s. Nobody can predict the future, but I don't expect they're going to stay this high for the next 30 years.
Taking the fixed rate mortgage is a great decision when rates are low, but rates aren't low.
I'd take the guaranteed lower rate for the next 7 years.
Your lifetime cap is 2%? Or adjustment cap? Most ARMs have both.
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Again, it's about timing. Your rate at adjustment is based on an index plus a margin. Right now most indices are at all time highs due to inflation, so if you adjusted today, you'd be screwed. Whereas a loan that adjusts every six months (again with a cap) would peak, but then start coming down as inflation and the corresponding index start coming down.
2% per adjustment, 4% lifetime. So if it adjusted now, it would be 2% over what we have now, which still isn't bad. Point is, 2% change over 5 years gives you time to prepare. What if it adjusts every 6 months up? No thanks. Too risky even for me, and I've never had a fixed mortgage.
That makes sense. Most 7/6 ARMs have a 5/1/5 or 2/1/5 adjustment cap. The first number being the max adjustment in the first interval after the fixed period, the second being the max adjustment adjustment at each interval thereafter, the last number being the lifetime cap.
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Your risk threshold is a very personal variable, so I'm not saying you're wrong, but just pointing out these two options aren't that much different. I have a 7/6 ARM with 5/2/5 adjustment terms and it doesn't worry me any more than one with yours would.
gapchuboy t1_iyd1izr wrote
Depends on your loan size. If it makes not a lot of difference in mortgage payment, I would go with 30 years fixed. You can refinance when rates come down.