Adjustable Rate Mortgage Loans?

[LivingAlmostLarge]

Yep, in 2005 our 30 year fixed was running about 6%, compared with 4.25%. It was a no brainer. We ran tons of numbers, such as I demonstrated. How much interest saved for 7 years.

Then how long it would take to pay that much saved interest with the higher interest rate. My rate caps at 9.25% which as MonkeyMama pointed out is not a terrible rate. Many people I know who bought in 1999 or so had 30 year fixed rates at 8%. Is 9.25% that terrible?

No. 6% is nice, but only if you stay put. Also another benefit to Arms with low interest rates is you can pay off your mortgage faster. If you have a 5/1 Arm like a friend, her goal was to pay off the house in 5 years. She did it by the way.

You have to examine the rate of the Arm, the capped adjustment rate, how much savings, your goals, your income, and future plans.

And by the way getting an ARM does not mean foreclosure. If you lose a job, you need an EF whether you rate is 4% or 6%. If you don't you'll lose your house whether you have a fixed rate or not. You still have to pay a monthly note, so which should it be? Higher or lower?

So it makes no difference. Arms don't cause problems. People do.

[Tree0164]

I think for many-ARM were ways of getting in to a home that they couldn't afford. Many people do not read the fine print that they rate can go up and up as well as their mortgage payment. If you know that you can afford a mortgage payment at the highest rate associated with your loan, you may have made a smart decision.

I have a fixed rate at just over 6%-I know my mortgage payment won't change. It gives me a lot of peace of mind.

For anyone right now, I would suggest getting a fixed rate and making sure you are not buying too much house. You can always refinance if rates go lower.

[jIM_Ohio]

Originally Posted by Tree0164

I think for many-ARM were ways of getting in to a home that they couldn't afford. Many people do not read the fine print that they rate can go up and up as well as their mortgage payment. If you know that you can afford a mortgage payment at the highest rate associated with your loan, you may have made a smart decision.

I have a fixed rate at just over 6%-I know my mortgage payment won't change. It gives me a lot of peace of mind.

For anyone right now, I would suggest getting a fixed rate and making sure you are not buying too much house. You can always refinance if rates go lower.

If you make something idiot proof, the world will invent a bigger idiot. Been happening for centuries.

I would agree with poster which is advocating 10/1 ARM, assuming the entering rate is low and the house is a temporary place to live.

I would agree with other posters advocating fixed most of the time, assuming the person getting the fixed rate loan would live in house for duration of the fixed rate loan.

It comes down to the quote made by another poster in this thread

So it makes no difference. Arms don't cause problems. People do.

The basic premise people need to understand is when you borrow money, you will be paying more for something (an assett) than it is truly worth.

If the asset appreciates significantly, it's possible the profit from the sale of said assett makes the cost of borrowing worth it.

If the asset appreciates moderately (like the average housing market in the US), the profit from the sale of said assett makes the cost of borrowing expensive. In this case minimizing the borrowing costs using loans like ARMs may help tip the profit balance.

I would recomend any person getting a loan look at 3 products:
30 year fixed (rate and payment)
15 year fixed (rate and payment)
one other product (ARM or balloon)

For example the rate on the 15 year fixed will be lower. It might be low enough that the payments for 15 year and 30 year look similar.

Compare the ARM payment to the fixed payments. It's possible you will save significant $$ with the ARM in first 2-3-4-5 years of the loan. If you look at the loan as a short term thing, and are willing to risk the rate changing, an ARM can be considered as well.

Always watch the use of always and never in posts. Never follow internet advice without thinking about it first.

[LivingAlmostLarge]

Treeluva, do you assume you will stay in your house forever? What if you lived somewhere you knew you wouldn't live more than 5-10 years? What if all you could afford was a condo but really wanted a single family home?

It has nothing to do with affording the house at the fixed rate. It has everything to do with looking at the situation/circumstance you are in. If it is a starter home, you probably should consider how long until you move.

And if it is a starter home, if there is a difference in the Arm/Fixed rate, then get an Arm. If an Arm costs the same as a fixed rate, get a fixed rate.

So I don't advocate fixed rate loans unless it's your final home. You need to examine where you are in your life, what you are doing, and why. Even if it's your final home I think an Arm an awesome way if it's low enough to pay off the home super fast say 5 years. People who buy very little house, large income why not try and go for it? If it goes over by a year, you'd have decresed the balance by enough to still make the rate hike worthwhile.

Thanks jim for quoting me about stupid people.

[Dave01]

Fixed rate, whether you are staying in the home for 1 year or 50. The amount of existing homes on the market is extremely high and will be rising even more by the second quarter of next year. The prices of homes have dropped 4.5% in the last quarter alone. Many people are trying to sell their house for almost anything that will get them out of it before their ARM resets and they cannot afford it. This is good for you as a buyer, but be aware that you will need to stay in the house long enough to let the market bounce back. Just food for thought.

[Jack Robinson]

Originally Posted by Sporkman

Yikes, I'd stay away from ARMs...

We have got same thinking...


regards,
Jack Robinson
knowyourmoney.co.uk

[Tree0164]

Originally Posted by LivingAlmostLarge

Treeluva, do you assume you will stay in your house forever? What if you lived somewhere you knew you wouldn't live more than 5-10 years? What if all you could afford was a condo but really wanted a single family home?

It has nothing to do with affording the house at the fixed rate. It has everything to do with looking at the situation/circumstance you are in. If it is a starter home, you probably should consider how long until you move.

And if it is a starter home, if there is a difference in the Arm/Fixed rate, then get an Arm. If an Arm costs the same as a fixed rate, get a fixed rate.

So I don't advocate fixed rate loans unless it's your final home. You need to examine where you are in your life, what you are doing, and why. Even if it's your final home I think an Arm an awesome way if it's low enough to pay off the home super fast say 5 years. People who buy very little house, large income why not try and go for it? If it goes over by a year, you'd have decresed the balance by enough to still make the rate hike worthwhile.
.

You got your act together however the majority of people do not have their financial act together and this is why we are having so many foreclosures these days. Many of the houses going into foreclosure are not starter homes, they are "forever home"

And I do agree with your quote....
So it makes no difference. Arms don't cause problems. People do

It comes down to personality responsibility however if a friend or family member was coming to be for advice, I would recommend doing the fixed rate mortgage.

[LivingAlmostLarge]

I'd actually look at the family member (I really have done this) and said how long do you plan on living there? And honestly sometimes I say why are you bothering to buy if you want to move in say 3 years?

I also say why are you buying so much house when you don't need it? Or why are you buying a house when you think you might move?

I don't think it's only due to affording home that caused the subprime. It's also due to people thinking they'll live there forever, then lose a job, and decide to move. Then their 30 years in the house is 2 years and they can't sell it because the market dropped or something.

People need to realistically assess just their lives and future. They can't just make assumptions that they'll live there forever, never lose a job, never move.

I mean if you are in a stable job great, but what if you choose to leave it?

[myself]

I have to agree with LivingAlmostLarge.

• Look at 3 products at least. The three mentioned (30 year fixed, 15 year fixed, 1 or more ARMs).
• Determine what your desired timeframe is for living in the house
• Determine what your desired timeframe is for living in the are

Use the above information as your basis for which product you will choose.


Our situation:
We bought a house in 2000 with a rate of 8% for a 30 year fixed. Since then we've refinanced to a 15 year fixed rate of 5.5% (30 months ago). Why we made the decision?
- we planned to live in the house for at least 15-20 years
- we planned to live in the area for at least that long
- we have 4 children who will be around college age at that time and may not go to local colleges
- we're working on the possibility of buying a single story house in a nice area that doesn't have high property taxes, for our retirement home, and renting it out for the first 10-15 years

[TheTexan]

Like other postings, unless you plan on staying in the house for a very short time, which isnt a good idea anyway, go with a fixed mortgage. You should be able to get a 15 year for a little more than a 30 year.

[Ima saver]

When I worked at a saving and loan assoc. from 1977-1980, the interest rates on homes was 9%. I would go with a fixed rate also, that is all I have ever had.

[shizane101]

Thomas,

It's great you're asking questions about this. I used to be a part-time mortgage broker and came across many people who didn't really understand why anyone would ever consider an ARM. They may have heard from a friend to absolutely stay away from ARMs. I'm seeing some posts about that here as well. That's too bad because there can be compelling reasons why, in some cases, you would choose an arm over a fixed rate. Some poster here have already done a good job explaining some of the reasons why you may want to go with an ARM such as, length of time you will be in the home and considering current interest rates on a fixed loan (are they historically high?).

I have a very cool Excel amortization spreadsheet I can send you if you'd like. You can plug-in the length of the loan, the amount borrowed, and the interest rate to see what your principal and interest (P &I) payment will be. It also shows you what your remaining balance is after every payment. Another cool feature is that you can plug-in an extra payment you make on any month of the loan and see how it affects your remaining balance.

One more thing... I've got some great tips on how to get the best deal when shopping for a mortgage broker. I wrote these up a year or so ago and emailed them to friends and family. Some of the are a bit unconventional, but I think its good info.

You can just private message me if you're interested. I can send these to anyone else who would like a copy.

[anonymous_saver]

Originally Posted by LivingAlmostLarge

Anonymous Saver, why do you assume I'm going to be paying 9.25%? Did you not read my post? I pay 4.25%, and I'm pretty sure I'm out by the 7 year mark. Um, so how am I paying more interest? If anything I just saved 1.75% interest for 7 years on $450k. How much is that? $55k. That's a lot of interest to have saved by not getting a fixed.

How long will it take me? Well I think the break even point is 55 months (5 years assuming an extra $1k in interest/month). That's 12 years right there, assuming I don't move or make a single extra principal payment in the next 60 months before the rate even adjusts.

So anonymous saver do you really think I'm going to not move in the next 10 years? Hmm..

If anything I'm coming out way ahead by looking long term at my goals, future predictions, and lifestyle. I'm saving about 2% on interest while "renting" my house. I don't own it. Instead more is towards principal.

Plus you don't get wealthy by being debt free. It's not about debt free, it's about net worth. Managing risk and properly leveraging your income/assets/debt.

For example no one buys a house in cash. Why? Because you spend years renting, instead of saving for a house in cash while renting.

I never assumed that you were getting the 9.25% rate... I was only commenting on how I believe it would be a terrible rate IF you get it (or anyone else for that matter). No where did I assume you were going to end up having that rate.

As far as you moving out of your house before 10 years is up... that's really irrelavent to me. I was only commenting on the possiblity.

We just share a different opinion. It's not a big deal.