10 arm vs 30 fixed

[aim-high]

hi,

I am planning to take a loan of about 760K. I am confused about taking a 30 year fixed vs 10 year arm. 10 ARM is about 0.25% less than 30 year fixed. I am planning to stay in this house for a very long time (I dont think I will outgrow this house in the next 15 years). I am definitely going to make an extra payment towards principal (around 30-40K every year). Should I go with 30 year fixed or 10 ARM ?

Any help is appreciated

[sblatner]

I think you should go with the 30 year fixed. .25% is not much difference. You don't say what the payments are but I would think a 30 year fixed would be lower. I like the option of lower payments if I can't send in extra towards the principal.

Do you want to share the payment amounts?

[kork13]

When do you actually plan to have it paid off? Will you be able to pay it off within the 10 years before it re-adjusts the interest rate? If you can do that, then I'd say go for it. Otherwise, I'd be very wary. ARMs can really get you because you don't know what the going interest rates will be 10 years from now, and .25% right now is not worth the risk of the interest rate potentially jumping up by 2-3% in 10 years with the mortgage only half-paid.

If you're planning to pay down your mortgage so aggressively, why not look at a shorter-term mortgage? A 10-, 15-, or 20-year fixed mortgage should all have notably lower rates than your 30-year fixed, and likely even better than the 10-yr ARM. Just for a quick comparison, you can check out some options here at Bankrate.com.

[aim-high]

@sblatner:
I dont know the exact number but 10 ARM is about $500 less than 30 year mortage per month.

@kork13:
yes, the idea is to payoff the loan between 10-15 years (max 15 years).
My dilemma is that if I dont plan to sell the house for the next 15 years and if I plan to pay off the loan within 15 years, why get a 30 year mortgage and pay more per month for the next 15 years.

[sblatner]

I guess the 10 year ARM has a balloon payment at the end of the term...is that right?

We got a 30 year loan for our house and paid it off in 17 years. My husband was laid off in 2002 and we were so glad that we had the option of paying a lower payment. If we had secured a 15 year loan, our payments would have been much higher. Once he got a new job, we upped our payments again.

This is where I'm coming from.

[disneysteve]

The problem is the rates have nowhere to go but up. I can't imagine that 10 years from now rates won't be higher than they are today. Of course, you will have had 10 years of $500/month lower payments meaning you will have saved $60,000 in payments.

Normally I would say to avoid ARMs but this might be one of those times when it could actually make sense. Even if the rate is higher 10 years from now, will it negate that $60,000 savings? You need to use an online calculator to run the numbers.

[kork13]

@kork13:
yes, the idea is to payoff the loan between 10-15 years (max 15 years).
My dilemma is that if I dont plan to sell the house for the next 15 years and if I plan to pay off the loan within 15 years, why get a 30 year mortgage and pay more per month for the next 15 years.

Perhaps I'm not understanding you... Are we not in agreement? I'm saying that you should forget both the 30-yr fixed AND the 10-yr ARM, and instead go for a 10-15 yr fixed mortgage. The rates on either one of those are lower than both the 30-yr fixed & 10-yr ARM, at least according to national averages -- you should, of course, check with your lender.

[disneysteve]

Perhaps I'm not understanding you... Are we not in agreement? I'm saying that you should forget both the 30-yr fixed AND the 10-yr ARM, and instead go for a 10-15 yr fixed mortgage. The rates on either one of those are lower than both the 30-yr fixed & 10-yr ARM, at least according to national averages -- you should, of course, check with your lender.

Also, keep in mind that 15 and 30 are not the only mortgage terms that exist. You can get a 20 or 25 years loan too. They may not advertise them but they offer them. We had a 20 year loan on our house until the last refi when we made it a 15.

[aim-high]

Perhaps I'm not understanding you... Are we not in agreement? I'm saying that you should forget both the 30-yr fixed AND the 10-yr ARM, and instead go for a 10-15 yr fixed mortgage. The rates on either one of those are lower than both the 30-yr fixed & 10-yr ARM, at least according to national averages -- you should, of course, check with your lender.

Hi,
But a 15 year fixed mortage would have higher payments per month correct which I cant afford, hence, did not consider 15 year fixed. I am sure it has lower interest but since i need to pay within 15 years, the amount per month is more. In the case of ARM, interest is low, payments are low and i have the flexibility to do additional payment per year (end of the year after i save some money)

[siggy_freud]

How do you plan to pay the loan off in 10-15 years if you can't afford the payment on a 15 year loan? I can understand wanting the flexibility of not HAVING to pay at a 15 year loan amount per month, just curious what the plan is to pay it down that fast regardless of the loan you end up with.

[LivingAlmostLarge]

what's the 5 year arm? how much extra are you planning on paying? It could be worth it dependent on how much extra you have to throw at it.