ARM vs 30 year fixed

[bullabulla]

I am offered better rates with ARM ( 3/1 or 5/1 ) Vs a 30 year fixed

what would be a better choice a 3/1 ARM or a longer fixed (30 years )

any suggestions dear members?

[sweeps]

How long are you staying in the house? If you're certain you're staying for less than 5 years, a 5/1 ARM would be a good choice. Any other scenario -- choose the fixed. It's unlikely interest rates will stay this low.

[bullabulla]

I plan to stay there for atleast 5 years and also want to keep my payments fixed atleast for the next few years

My median credit score is 629 ( messed up school :-) ) and the LTV of 95%.

I was offered
3 YR ARM - 5.125% - 1 pt ( This is my preference )
5 YR ARM - 5.625% - 1pt
7 YR ARM - 5.875% - 1pt
30 YR Fixed - 6.375% - 1pt

My score will improve in 3 years and hoping to refinance at that stage

But how the interest rates will be in 3 years -

any advice

[jIM_Ohio]

Those rates are not bad. Just because the payment is lower now should not be the driving factor for 3/1 ARM. The bank lowers the rate most on a 3/1 ARM because it will recoup the lost revenue and then some when the rate resets to 8% in 3 years (or whatever percents are in 3 years). I remember having a mortgage at 8.5% in 2000, so do not assume rates are always below 7% or 6%.

I would do either the 7 year ARM or 30yr fixed. If you think lowering your credit score can improve the rates, it will do so by maybe an .125%... not much.

[skydivingchic]

My advice would be to go with the 30 yr fixed. Interest rates are near some of the lowest levels they have ever been, which means they really have nowhere to go but up. If you get an ARM, it is likely that your interest rate after the ARM adjusts will be over the rate on the 30 year fixed.

[disneysteve]

My advice would be to go with the 30 yr fixed. Interest rates are near some of the lowest levels they have ever been, which means they really have nowhere to go but up. If you get an ARM, it is likely that your interest rate after the ARM adjusts will be over the rate on the 30 year fixed.

I agree. I think an ARM is playing with fire.

[markusk]

5 year ARM is risky.

Even if you are sure you're going to move in 5 years, are you equally sure someone will buy your house in 5 years? This is the risk.

If you have problems selling (for whatever reason), you will have to continue paying the mortgage with the new adj rate until you sell.

BTW, is the 5 year ARM or 7year ARM the only way you can afford the home?

[zetta]

It would be interesting to get a quote on a 10 yr ARM, just for comparison.

The 30 yr fixed is the safest option -- you can always refinance if your credit improvements help.

The 7 yr ARM is worth considering if this is a starter home and you plan to trade up. Just know that it is a greater risk that you are taking, and look hard at how much the payments can go up when the 7 years is up and whether you will be able to handle them.

I would avoid the 3 and 5 year ARMs like the plague.

[disneysteve]

The 30 yr fixed is the safest option -- you can always refinance if your credit improvements help.

No. You can't always refinance. You can only refinance if rates are favorable at the time and you can drop your rate far enough to make the transaction worth doing.

However, what you can always do is prepay and shorten the term if you choose to.

[LivingAlmostLarge]

7/1 Arm. If you are likely to stay there 5 years. And it will give you time to get a better score.

[disneysteve]

For those of you who would advise an ARM, do you all have crystal balls? How does anyone know for sure how long they will stay in their home? Maybe it will be 5 years. Maybe 3. Maybe 9. Maybe 40. Sure, you might have some idea of what you'd like to do, but you can't predict the future. How many people thought 5 years ago that they'd take an ARM and refi or sell before the rate adjusted and are now stuck in a house they can't sell and can't afford to keep?

What if your job changes? What if your marriage runs into trouble? What if you run into medical problems or other financial problems? What if you put your house on the market and it takes 18 months to sell it?

I still say go with the fixed rate loan no matter what.

[maat55]

I would buy what you can afford on a 20 year or less, fixed.

[Brokemofo]

Go with the 30 year fixed. I talk to many people everyday who took arm's 3 to 10 years ago and can't refinance now. Their home is worth LESS than they paid for it, banks are more restrictive with loan to value, and it's very hard to do liar (stated) loans today. They are stuck in a home they cannot afford, can't sell, and I have to tell them sorry, but I can't get you a loan.

[LivingAlmostLarge]

Because it really depends on situation. Would you agree that I bought a townhouse because I couldn't afford a single family was a reasonable choice? But I knew that one day I would want a single family within 7 years? That I didn't want to raise my children in a townhouse, but it was unreasonable for DINKS to buy a SFH?

Also that we were starting out in our careers, and we knew our incomes would go up. It has. Once we're done with tuition we can likely afford a SFH.

So why not get an ARM? It's fixed for a set amount of time. And you know what you are paying. If you lose your job, etc, I still would have to pay rent. There is no solution unless you own your home outright. Which someone in their 20s is next to impossible to do.

So you need an EF. We have cash in the bank. That's the best we can do is prepare for the worse. But if we rented it would cost about the same. Unfortunately we live in an expensive area.

And more importantly we know we're leaving the area in 5 - 7 years. If we don't we're going to live in a single family. But because we live in such an expensive area, hence the townhouse.

Now the same decision might not have been made if we had been able to afford a single family. If we lived anywhere that a single family cost $500k or less we'd have bought a single family. But we don't. We also would have gotten a fixed rate because it would have been more likely to stay put. But with children a townhouse with 3 stories is not likely. And while we can do it for a bit (which is the plan), we aren't going to live like that forever.

Hence an ARM. We put down 20%, and have had 3 appraisals because we were thinking of refinancing to a fixed rate if a 30 year dropped to 5%. Our appriasals came back at what we paid for it. Why?

Because when we bought there were issues like a retaining wall, heat, etc. Our seller agreed to pay for it if we repaired it. So we did and it increased the value of the house. Also when we bought it had been sitting on the market 2 years. So we bought it I think for a lot less than the market 2005, dictated, so when prices started falling we had already bought a sort of distressed property.

Another thing is we did some work on the place because the backyard was totally unlandscaped. We paid $2k and it has a new retaining wall. Also at the time the 3rd unit was unfinished so it was a negative on the property for resale. Now it's finished and has owners living there.

So all these factors affected I feel the price.

[noppenbd]

On a $200K loan, the 0.5% difference between the 7/1 ARM and the 30 year fixed comes out to about $65 a month. If you are itemizing your taxes and you are in the 25% marginal tax bracket, the after tax cost of that interest is $49 a month. No one knows what rates will do, but there is a lot more upside potential than downside, since we are near historic lows. It is really a personal decision: if there is a reasonable chance you would stay in the house longer than 7 years, it might be worth taking the fixed rate, and considering the $49 insurance against rate increases.

I think it is dangerous thinking to say "you can always refinance later, once your credit score improves". This line of thinking got a lot of people in trouble recently.