5/1 ARM vs. 30 yr fixed

[kathywathy]

Does anyone have opinions?

The mortgage broker is pushing the 5/1 ARM. I'm leaning towards the 30 year fixed, just for stability sake.

But he makes a good points, realistically, I'm not sure if we'll be in the house for more than 5 years.

I think my big fear is what if I'm not working, we have 3 kids at the time and then we have to refinance and rates are astronomical.

I was adamant about the 30 year fixed on our current house and we were barely here 2 years and now we're moving.

[polarama]

What are the rates like? When we bought our house earlier this fall, the difference in rates between the 5/1 ARM and the 30 year fixed was less than 1%. The savings weren't worth it to me--I opted for the stability of a 30-year fixed.

[kindermom]

I am not a banker and I do not play one on TV. But...

Both the mortgage people I spoke with prior to getting a mortgage said to avoid ARMs when the overall mortgage rate is low and if you plan and being in your home for more than a few years. They explained it to me this way...In a few years, we could end up paying 8+% (and as high as 11%) for a mortgage or we could settle for a 6% fixed. The ARM rates are really low right now but that is because the overall interest rates are low. But that is not likely to remain the case.

ARM make sense if you are planning on being in your home for a very short period of time (i.e., less than 5 years). Then you can capitalize on the low interest rate early on and will be out of the house before the interest rate hikes start taking effect.

[wonderpup262]

I wouldn't go for the ARM unless you are 100% sure that you are going to move within 5 years. Rates could go way, way up in that time period. To me, it wouldn't be worth the risk. And the mortgage guy has a vested interest in 2 ways. First, it's possible that he may get a bigger commission for selling you an ARM. Second, he probably wants people to move around a lot, because it means more business for him.

But if you're definitely gonna move, then go for the ARM and don't pay any points.

[udsweetpea]

As a brand spankin' new loan officer, I would say to go with the 30 year fixed since the rates are low right now. You could always refinance if the rates drop to the point where you can get a better deal.

[ejs]

We just refinanced and got a 5/1 ARM. We know we'll be moving in less than 5 years, so that's why we decided to do it.

[ee_chick]

We used a 5/1 ARM for our first home since we were nearly certain we'd be there for less than five years. That was a good decision for us. I was ready to settle into a fixed rate this year, as I was uncomfortable with the continually rising mortgage interest rates. We chose to move into our forever home, but I think I would have locked into a fixed rate if we hadn't moved. If I were buying now and I thought there was a reasonable chance that I would be in the home in four or five years, I'd take the fixed if the rates were anywhere close to each other. I don't have a high risk tolerance though, when it comes to a fluctuating mortgage payment.

[smartgrrl]

go for the fixed. the fact that your mortgage broker is trying go get you to go with a 5 arm is quite telling. obviously, it's better for a bank or morgage company to get you to go for the arm, since in a few years, they'll be able to start charging you higher and higher interest payments.

[ellybelle]

We got a 30 year fixed with an interest only option for the first 10 years. We plan to set things up so that we'll automatically be paying down principal, but will have the option to pay interest only if we hit a rough few months.

[amorey]

Is there a cap on the ARM? We went with an ARM because we knew we wouldn’t be here more then a few years. But, if things don’t work out how we planned, the ARM will never be more than 8.5%. I certainly hope we don’t end up in that situation, but it’s good to know that our mortgage won’t become more than we can afford.

[BTB]

Besides an overall cap as amorey mentioned, there are ARMs that have a limit on the amount of fluctuation permitted each year. Say you have 4.9% one year, after your initial fixed period is over, there may be a max deviation of 2% so you won't pay more than 6.9% interest the sixth year. That gives you a bit of time cushion should you need it later.

We'll be facing down the same decision this winter/early next spring, and we're leaning toward an ARM. We're planning to buy a starter home first, and five years fits nicely into the timeframe in which we'd like to move anyway.

[mkredhead]

I worked with my lender on a 5 year arm. I know I will be moving within five years, so it was the perfect choice for me.

If you think you'll be staying longer, consider the 30-year fixed.

[Aimee]

We got a 7/1 ARM, because we didn't anticipate staying in our 2 bed/2 bath condo any longer than that. If we were to decide to keep it as rental property, we figured we'd just do a refi, and deal with it then. But it was worth the short-term savings for us to do the ARM, since the rental property was just an "if" and not worth spending money on in the now.

[BethElena]

We went with the 30 year mortgage option. We don't plan on living here forever, but I don't want to risk paying more than 6% right now on a mortgage. I'm just not the type of person who likes to take risk.

[chiclady815]

We have a 5/1 ARM because we know that we won't be here more than 5 years. However, refinancing is ALWAYS an option if rates jump. A point makes a huge difference in the amount of money you will pay a year in interest. For example, a 200K mortgage with a 6% rate will pay about 12,000 in interest in the first year. A 200K mortgage with a 5% rate will pay approximately 10,000 in the first year in interest. That's a difference of $166 a month. In my world, that's a lot of money and I'd like to keep that with me - or if I can afford it, put it toward the equity in my home.

[ks_piper]

We're going with a 3/1 ARM - because it is the FHA loan we qualified for with our piddly income and less than perfect credit. And we fully plan on re-financing prior to the 3 years. We just moved to this area last year and are still making our way and building our financial stability.

If we could have, I would have preferred a fixed rate, but the sins of our youth and our move to different fields for work left us with the FHA 3/1 ARM as our only option to buy. Fine by me!

DH has done all the math and even at the max interest, our payments would still be very manageable. Thankfully FHA does cap how much they can increase your interest per year.

[Rose]

We have an adjustable. We bought two years ago and started out with 4.5% and if we wanted a fixed rate it would be 6.5%. Our rate can only go up 1% a year and only a total of 5%. I think our's is still below 5% and we knew if it did raise we would have two years to get to the 6.5%.

[BTB]

That's a difference of $166 a month.

It's really helpful to see the difference in such concrete terms! Thanks!