Quote:
Originally Posted by noppenbd
Assuming he is definitely moving in 1-2 years, and if the choices are:
1) Allow rate to float to 5.25% and pay nothing extra.
2) Bump rate to 4.25% and pay 0.75 pts.
Then #2 is mathematically better. With #1 you are paying 1% more interest each year ($2800) for 2 years, versus #2, adding $2100 to the loan.
This is assuming that otherwise the 2 loans are identical (both float the rate every 2 years).
That said, I generally detest ARMs because you never really know if you will be able to move in 2 years (will the market recover, financial situation changes, etc).
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Agree on the math, but that $2800 needs to be looked at from two sides
It is only $2100 after taxes
If he could apply $2800 to pay down principal, what would the effective payment change or interest rate be? He does not have the $2800, so the principal balance goes up. Might save on interest, but it might extend the term more than needed. Not sure how to run that- it would be a complex ammortization table.