Fixed or Arm Mortgages

[LivingAlmostLarge]

I was wondering do people have mostly fixed or Arm mortgages? Which one do you have and why? What are the benefits? How long ago did you get your mortgage?

I guess I'll start. I have a 7/1 arm last year, and I am happy with it. Not sure if we want to stay in the area and definitely wanting to stay in the house any longer than 7 years. My benefit is the low rate, it will take 77 months at the capped highest interest to make back what I save in interest during the first 84 months. So it after almost 14 years I will lose money on the deal. Until then I guess I'm okay.

[sweeps]

I'm on the tail end of a 5/1 ARM @ 4.25%. Looking forward to rates going down so I can do another low-rate ARM when this one expires. I didn't plan on living in my current house for 5 years, but turned out I did -- definitely plan on being out before another 5 years is up.

[frugalmomof1]

I am about 2.5 years into a 30 year fixed at 5.25%. We plan on staying in the house for several years and that rate was too good to pass up!

[vsjhoc]

I am 1.5 years into a 10/1 ARM @ 5.25%. I figured that within 10 years, either (a) I will have sold the house or (b) rates will have gone up and then down (and maybe up again and down again). I could have gotten a 5/1 ARM @ 5%, but I didn't want to be pressured to make a decision if I'm still in the house in 5 years ...

[banana]

I'm 4 years into a 15 year fixed at 5.125%. We dont plan on moving.

[disneysteve]

We are 43 months into a 25-year loan at 5.875%. That was a refinance from a 30-year loan before that. We lowered our rate and payment and shortened the term by a year or so when we refinanced. We have no plans to move.

[vsjhoc]

It's a tough call when a single person like me refinances their mortgage.

You have to ask yourself, where will I be in 5 years? In 10 years? My crystal ball is cloudy these days, so the answer is ... I have no clue. I can't begin to know whether I'll be married or single, living with someone or not, living in my current city or not, working with the same income or not.

Plans to move? Yeah, someday ... let's hope it's when it's a seller's market when I sell, a buyer's market when I buy, and mortgage rates are rock bottom low...

[LivingAlmostLarge]

me too. I think our place is cute, but not quite the right place yet. I'll get it right eventually. We're 1.5 years almost into a 7 year arm at 4.25%.

[MonkeyMama]

5.75% fixed.

Because we never intend to move and historically as mortgages go you don't get much better than the 5-6% range. We decided to lock it in for the long-term. I am not much of a risk taker so fixed for me.

We locked it in around 2003.

We started at around 8%, 30 years - in 1999, had a 15-yr in the 6% range for a while. Moved in 2001 and had 6.25% fixed. THought I would never refi again. Refied right before we had children down to 5.75%.

To me ARM = risk, but certainly doesn't make it a bad choice. I think overall most people get in way over their head. I know many people who have made small fortunes on ARMs in the California market. They were in way over their head but got out in time. There is a whole risk/reward to it as with all things. I know a few people who knew what they were doing as well, for them was a good choice. IT so depends.

[tinapbeana]

unfortunately i have an ARM. i stumbled upon this house (actually DH did) and we had to move fast, didn't have enough down-payment, and our credit is basically junk. bluh... good news is that even with an ARM at a bad rate we're still saving money every month over renting, and we signed the papers knowing we would refinance with my credit union at a much better rate well before the first adjustment on our ARM.

[bjl584]

I am 2 years into a 15 year fixed at 5.25%. Fixed was the way to go for me. No worries about the payment ever changing making it much easier to budget. Much more sound way to build equity in the house too. My thoughts are that if the only way that you can afford a piece of real estate is by getting an ARM, then you should either keep renting, save more money before purchasing, or look at less expensive pieces of property. There are some reasons that someone may want to get an ARM in certain investing stategies such as flipping or renting, but for the vast majority of people, I feel that an ARM is a bad decision.

[disneysteve]

Originally Posted by bjl584

My thoughts are that if the only way that you can afford a piece of real estate is by getting an ARM, then you should either keep renting, save more money before purchasing, or look at less expensive pieces of property.

I agree. I think a lot of people in recent years got themselves into trouble by overextending themselves to buy homes with ARMs or interest-only loans and when the payments adjust or the principal payments start, they will be in deep trouble.

[tinapbeana]

Originally Posted by bjl584

My thoughts are that if the only way that you can afford a piece of real estate is by getting an ARM, then you should either keep renting, save more money before purchasing, or look at less expensive pieces of property. There are some reasons that someone may want to get an ARM in certain investing stategies such as flipping or renting, but for the vast majority of people, I feel that an ARM is a bad decision.

i agree with you, but in our situation the monthly payment at the highest cap interest rate for our ARM was still less than we were paying in rent, which made staying in a rental a financially poor decision. our junky mortgage was due to poor credit decisions in the past rather than buying a house that was out of our price range.

ah, well: que sera, sera...

[Diolla]

Mine is a 30 year 6.125%. My mortgage was so small ($27,000) nobody wanted it. It will be paid off by 2010 at the latest.

[LivingAlmostLarge]

LOL. Great responses people. On my blog I discussed this and sort of alluded to the math above. But more than math there were a ton of financial reason for me personally to get an ARM and I want to defend it because I feel that ARMs have a bad rap. Let me lay out the math and personal reasons why getting an ARM does not mean you cannot afford it. Our ARM is traditional, 7 years fixed, then adjusts annually, not interest only or option arm.

First off we had 20% DP, max out our 401k/Roth IRAs/ESPP (15k/year limit = total savings close to $38k/year), had EF and still have a pretty nice lifestyle. Could I have afforded the 6% fixed rate? Yes, but I didn't want to. At the 4.25% our cap is 9.25%. We will save $41k over 7 years of interest and our debt at that point will be lower by $60k. We will owe $400k at 9.25%, which increases our payments by ~$500/month.

To make up the $41k will take 77 months of higer rate to make up the interest we saved in the first 84 months of the loan. All in all that means it will take us over 13 years to break even having the lower rate first, then moving to the absolute maximum rate for the next 6+years. This leads to the question will you stay in your house 13 years?

Probably not, it's a town house and we'll be moving probably in about 7 years if not sooner to a single family home. We ideally want to live with detached walls, and renting is just as expensive where we live.

But not affording the place at the 6%, 30 year fixed was not the reason for us not getting a fixed loan. It was a combination of saving on interest, knowing this was NOT our final home, and knowing that we can easily manage the 9.25% rate as well.

I guess I should add our purchase was also based on DH's income, because I'm a student so...I take money away from the house, not add to it. I guess when I finish and work we'll have enough more money to afford the mortgage. Which also played a role in our decision.

In case you ask what if he loses his job? How is that any different from a couple who have 1 breadwinner/1 stay at home spouse and a fixed rate? You have mortgages either way.

[bjl584]

Originally Posted by tinapbeana

i agree with you, but in our situation the monthly payment at the highest cap interest rate for our ARM was still less than we were paying in rent, which made staying in a rental a financially poor decision. our junky mortgage was due to poor credit decisions in the past rather than buying a house that was out of our price range.

ah, well: que sera, sera...

Well, your situation is a rarity. I say that because obviously you and your husband knew what you were doing. You had a plan, and worked hard to get things turned around. For the vast majority of people that apply for ARMs there is no plan, no forethought. They use an ARM to buy a piece of property that they could otherwise not afford. Within a few years, the grace period is up, the payments go way up, and people find themselves in big trouble. Just look at the spike in foreclosures recently.

[sweeps]

Originally Posted by bjl584

Fixed was the way to go for me. No worries about the payment ever changing making it much easier to budget. Much more sound way to build equity in the house too.

I agree that if you can only get into a house by getting an ARM then you shouldn't be buying. But ARMs can be a very good decision for some people. I'm going to come out way ahead by paying less interest with my ARM, even if I go a few years beyond the 5-year fixed portion.

If you want to build equity in your house faster, you want a lower interest rate. Getting an ARM is one way to do that.

[LivingAlmostLarge]

True, in Canada, all you have are ARMs. They usually give you a rate for 5 years fixed, then you renegotiate with the bank. They usually also never take 30 years to pay off the loan. My MIL was outraged at the thought of us locking in a rate for 30 years! She said it costs too much, what if rates, drop? Why not keep locking every 5 years? Sure it goes up, but it can also go down, so it's also dependent probably on culture.

So if you told a Canuck get a fixed rate, they'd ask where? And what and why?

[disneysteve]

Originally Posted by LivingAlmostLarge

My MIL was outraged at the thought of us locking in a rate for 30 years! She said it costs too much, what if rates, drop? Why not keep locking every 5 years?

If rates drop, you refinance. If rates rise, you're protected. We've refinanced our mortgage twice since we bought our house, and shortened our term in the process.

[LivingAlmostLarge]

LOL. But you can't explain that to someone whose had lower rates at 3% or lower and had rates at 12%. She's just from a different culture and can't get it. It's not worth arguing, I already tried. She said it costs more to pay 6%, plus mortgages up there typically last 15 years.