4.75 Fixed or 3.8 ARM for 7 years?

[Anonymous]

We finally were approved for a home last month. Our loan officer is really pushing us to take a 3.8 ARM for seven years. The difference is only about $100 dollars a month. A friend advised me that we probably would not be saving $100 a month but just spending it somewhere else. I thought maybe putting in in savings or increasing our 401 k contributions. After 7 years the rate could go up as high as 9 percent. Obviously we would try to refinance during that time but we have no idea what the rate would be at that time but we assume it would be higher than 4.75 percent. We plan to stay in the home for about 10 years. We are just looking for advice, thanks.

[gpeach]

Personally I would take the 4.75 fixed rate or look into buying it down. If reasonable cost you would save aprox 12,000.00 over 10 years. So if it is worth it to buy down you still save a chunk while still getting a fixed rate. Plus you just don't have to even think about it. Down the road refinancing or buying another home may not be an option due to many different things. Life happens. Walk on the safer side.  

[gpeach]

Oh forgot to say congrats!

[MYFICOisWACKO2]

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@gpeach wrote:

Personally I would take the 4.75 fixed rate or look into buying it down. If reasonable cost you would save aprox 12,000.00 over 10 years. So if it is worth it to buy down you still save a chunk while still getting a fixed rate. Plus you just don't have to even think about it. Down the road refinancing or buying another home may not be an option due to many different things. Life happens. Walk on the safer side.  

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Ditto ALL OF THIS!  I work in Mortgage Loan servicing and you will not believe the stories when there are ARM adjustments and ESCROW increases too!   Our clients are LIVID as the LO fails to mention the long term effects of ARM loans.  Those are ideal for investors and people who have no plans on being in the home for a long period of time or at least until the loan matures.  Not for us common folks who plan on paying the property off at some point in our life. 

[ShanetheMortgageMan]

What is the initial rate change cap, and subsequent rate change cap?  If it's 2% & 2%, then year 8 of the ARM could be 5.8%, and year 9 it could be 7.8%, and year 10 it could be 9%.

With a $100k loan, at the end of 10 years on the 4.75% fixed rate mortgage, making regular payments, you will owe $80,721.99.  Payments are $521.65/mo.

At the end of 10 years on the 3.875% ARM (usually rates are in .125% increments), making regular payments, and assuming the above rate changes above, you will owe $81,120.   Payments would go from $470.24 to $567.54 to $670.43 to $729.86.

Assuming only a 1% rate increase in each year 8, 9 & 10, making regular payments, you will owe $80,010.23.  Payments would go from $470.24 to $517.69 to $565.80 to $614.33.

If the rate never changes on the ARM, after 10 years, you will owe $78,449.

What is your margin?  What is the index the ARM is based on?

[austinguy907]

I would look into a few local CU's and compare rates.  I just closed last friday @ 3.25% on a 10 year fixed w/ 58/mo PMI w/ 5% down.  The biggest factor for me was the PMI being about 50% less than other lenders.  If it's avoidable then you're going to look at the other fees they try to bundle into the pricing of the loan.  I was looking into the ARM option as well for the reduced rate planning on making higher than req'd payments to knock out the PMI faster.