5/3 ARM vs 30 year Mortgage

[cards66]

I am a first time home buyer and need a little advice. I am looking at taking out about a $205,000 mortgage. We are about done with the building process and the construction loan. The bank I used for the construction loan is offering a special 5/3 ARM with a starting rate of 1.95%. These are the details of the loan. I am trying to figure out if I should go this route. By paying the same amount I would on a 30 year mortgage I could pay a lot of principal off in the first 11 years of the loan. I have great credit and will not need PMI. I wanted to see what others thought? THanks in advance.

Loan Term 360 Months
Initial Fixed Period 60 Months
Subsequent Adjustment Period 36 Months
Initial Adjustment Cap 2.000%
Periodic Adjustment Cap 2.000%
Maximum Interest Rate Initial Rate + 6.000%
Index Weekly Three Year Constant Maturity Treasury (CMT)
Current Index Value 0.69%
Margin 3.250%

[LivingAlmostLarge]

For 1.95% starting for 5 years then capping lifetime at 7.95%, I'd do it. Sounds like it'll float a maximum of 3 years since you can only rise 2% a year. Great deal. See how much you'll pay in 5 years and recalculate it at 3.95% then 5.95% then 7.95% and I bet the saving is still very generous.

[Petunia 100]

I am a first time home buyer and need a little advice. I am looking at taking out about a $205,000 mortgage. We are about done with the building process and the construction loan. The bank I used for the construction loan is offering a special 5/3 ARM with a starting rate of 1.95%. These are the details of the loan. I am trying to figure out if I should go this route. By paying the same amount I would on a 30 year mortgage I could pay a lot of principal off in the first 11 years of the loan. I have great credit and will not need PMI. I wanted to see what others thought? THanks in advance.

Loan Term 360 Months
Initial Fixed Period 60 Months
Subsequent Adjustment Period 36 Months
Initial Adjustment Cap 2.000%
Periodic Adjustment Cap 2.000%
Maximum Interest Rate Initial Rate + 6.000%
Index Weekly Three Year Constant Maturity Treasury (CMT)
Current Index Value 0.69%
Margin 3.250%

What rate can you get right now on a 30 year fixed?

[cards66]

I can get 30 year around 4.5% to 4.625% currently.

[Petunia 100]

Well, then you know AT WORST you will pay less interest with the adjustable for a full 8 years. If you plan to aggressively pay down your mortgage, the adjustable makes a lot of sense. Your rate is much more important when you owe 205k than when you owe 50k.

However, if you do not aggressively pay down your mortgage, chances are quite good you will be at 7.95% for years 11 - 30.

Also, you should consider the possibility that you may wish to sell the house and move at some point. If you decide to move 5 years from now, then the adjustable will have clearly been the better choice.

[Goldy]

This is very similar to the choice we made on our 5/1 Arm loan. When I was weighing the options I calculated the cost of interest assuming it shoots up to the max after 5 years and even with that our break even date was over 9 years. So, if we move within 9 years we win and that was a risk I was willing to take because we have an affordable payment. With that said, before I can say whether this will work for you I need to know how much money you make because it doesnt do you any good if the lower rate is the only thing allowing you the funds to make those payments.

Can you realisticly see yourself being able to make payments at the max interest rate? If so then it might be a good idea but try to factor in things down the road like kids or other big events.

My goal is to have my loan paid off in under 9 years and never need a mortgage again and the low ARM rate is helping me achieve that goal.

[Goldy]

One more thing, how do the closing costs differ between the two loans? I wonder if you are going to pay a premium in closing costs for that very low rate.

[cards66]

The closing costs are the same on the loan. Now that interest rates start to drop again I may have to run the figures again to see what makes the most sense when I get ready to close.

[YLTL_Dan]

This is very similar to the choice we made on our 5/1 Arm loan

Same here, we took a 5/1 ARM a few years ago and it worked out well. However, we were pretty certain we'd move before the five years was up and that's exactly what we did. The only thing that'll get you is if you put off paying extra principal and you get stuck at the max rate for a long time.

[cards66]

I don't think I will have a problem sticking to paying the extra payments. This will be our forever home, so we have no plans on ever moving. I keep running the numbers and it seems silly not to take advantage of this loan even if the rates do go up in the future. At that point I will have paid a lot of the principal off and can refinance to a 15 or 20 year loan.