ARM vs 30 year fixed

[zetta]

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.

I just wanted to clarify my comment about refinancing -- I actually meant it the other way around, as in, "take the less risky (although more expensive) 30 yr fixed loan now, and if in 2-3 years your improved credit score qualifies you for a better deal, you can then refinance."

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.

This is absolutely the kind of calculation you need to look at in order to make a sound decision. I would not take the risk to save $49 - $65 a month. However, when my DH and I took a $400k loan, the difference between the 10/1 ARM and the 30 yr fixed was about $500 a month, which made it worth the risk. (It also enabled me to be a SAHM for a few years, while planning to reenter the workforce before the ARM adjusted.)

[Snave]

I've done both the Fixed and ARM route. Currently we have a fixed mortgate, but our last home ws a 5 year ARM. For us it was the right thing to do. We put a considerable down payment on the home, so we wouldn't have been hurt had their been a downturn and the home lost value. As well, we could have easily afforded the rates when the rates went up had we not refinanced or moved. I have seen comments about getting sick or something like that. That could have easily happened had we had a fixed rate as well. We knew100% that we would not be in the home for more than 4-5 years. We bought well below what we could afford and knew that we would be moving. For us it was a smart move. Now, we are in a home we will (could) be in for the rest of our lives and went with a fixed.

[My9fam]

Arm vs30year fixed

hi,I am also in a situation now where I am told that a 7 year fixed arm is a good decision for me.I am currently in a 30 year fixed at 5.89 .I was told by a loan officer that with a 7 year fixed I can save 380.00 a month and be at 4.5 .which is quite lower than what I am now.I was told I can refinance,sell etc. When I want.and also no penalty for pre payments.any advice?it seems like a good move to me,and also I have very good credit.thanks for any advice.

[walker.kenny]

A 5/1 ARM will give you more flexibility IMO.

[FrugalGirl321]

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

Personally, I would stay away from most ARM mortgages right now, especially under your circumstances (only 5% down). That said, ARM mortgages definitely have their place in the housing market.

Fixed rates are so low today that they don't have much lower to go. I would not risk getting into an ARM when rates are MORE likely to rise vs. fall, especially when most housing markets are continuing to decline or struggle to maintain resale value.

[Shewillbemine]

Most people who got into trouble (and helped burst the housing bubble) have ARM mortgages. I'd rather lock in a low, constant rate that gives me peace of mind everyday (which is exactly what I did).

[LivingAlmostLarge]

I went from a 7/1 arm and refinanced for free to another 5/1 arm to a lower rate. We're still planning on moving within the time frame and saving on interest. Long term it still makes sense. Minimizing interest while maximizing our income. On the plus side we refinanced from a jumbo to a normal loan. 4.25% 7/1 arm to 3.5% 5/1 arm. We are set, it caps out at 8.5% in 1 years with a maximum of 2% so it would take 3 more years to max out at 8.5%.