SantaMar - we are in our "forever" home and choose a 5/1 ARM. The payments are low and we are socking everything we have into the house. EVERYTHING extra. We want to get the house paid off in less than 5 yrs. The wonderful thing about the ARM is that the interested is calculated once a month on the principle balance. So making extra payments on the mortgage (just made 3 payments today on the principle!) WILL affect how much interest you pay.
If we had done a fixed rate, than we would be paying a fixed amount of interest every month, a predetermined amount when we got the loan. Any extra payments on the principle (like we are doing now) would come off of the back end of the loan. Once we wiped out the principle on payment 360 (30 year loan), then the interest associated with that payment would magically disappear. Of course, payment 360 is at the very end of the loan and very little interest would be associated with that payment. So it's more work and takes longer to pay down the mortgage, but it is very doable.
When we choose the 5/1 ARM, we were a little concerned about whether we should choose the 7/1 ARM at a higher interest rate. In the end, we said we knew we could afford the 5/1 mortgage payment on unemployment. In the end, we knew that if we missed our goal of paying off the mortgage in 5 years, the interest bump up and the higher payment was still doable.
Due to DH's job, we could move at any time for employment. Such is life. It's not likely to happen, but it could. We have a kid in college. We pay cash for his education. Expenses vary each quarter. Our vehicle has many miles on it - the number is higher than our annual salary! 
<---- just a fun fact. Stuff happens. Life happens.
What if you do get the 7/1 ARM? What if you make extra payments on it and get it paid off in 7 years? What if it takes 8 years? In the super big picture, not a big deal. And if you move in 7 years, and the house is paid off, you have a lot more options. If the house is almost paid off when you move, you have a lot more options.
We went with the 5/1 ARM and don't regret it.
Please let us know what you decide to do.
@IOBA wrote:@SantaMar - we are in our "forever" home and choose a 5/1 ARM. The payments are low and we are socking everything we have into the house. EVERYTHING extra. We want to get the house paid off in less than 5 yrs. The wonderful thing about the ARM is that the interested is calculated once a month on the principle balance. So making extra payments on the mortgage (just made 3 payments today on the principle!) WILL affect how much interest you pay.
If we had done a fixed rate, than we would be paying a fixed amount of interest every month, a predetermined amount when we got the loan. Any extra payments on the principle (like we are doing now) would come off of the back end of the loan. Once we wiped out the principle on payment 360 (30 year loan), then the interest associated with that payment would magically disappear. Of course, payment 360 is at the very end of the loan and very little interest would be associated with that payment. So it's more work and takes longer to pay down the mortgage, but it is very doable.
When we choose the 5/1 ARM, we were a little concerned about whether we should choose the 7/1 ARM at a higher interest rate. In the end, we said we knew we could afford the 5/1 mortgage payment on unemployment. In the end, we knew that if we missed our goal of paying off the mortgage in 5 years, the interest bump up and the higher payment was still doable.
Due to DH's job, we could move at any time for employment. Such is life. It's not likely to happen, but it could. We have a kid in college. We pay cash for his education. Expenses vary each quarter. Our vehicle has many miles on it - the number is higher than our annual salary!
What if you do get the 7/1 ARM? What if you make extra payments on it and get it paid off in 7 years? What if it takes 8 years? In the super big picture, not a big deal. And if you move in 7 years, and the house is paid off, you have a lot more options. If the house is almost paid off when you move, you have a lot more options.
We went with the 5/1 ARM and don't regret it.
Please let us know what you decide to do.
Actually the interest on a fixed rate mortage is simple interest and only the payment and interest rate are fixed.
If you pay extra principal payments like you are doing with your adjustable rate loan the interest on a fixed is still calculated on the remaining financed balance. Yes, you still have to make at least the minimum monthly payment - but the allocation monthly changes. Look at the amortization schedules and you will see how the interest payment as a function of the full payment reduces monthly.
For you IOBA the adjustable works because you will have it paid off in just a few years, but the average person won't have it paid off before the adjustment period and will be subject to the rate change. it's not a bad program, just a little more risky for the average borrower because the rate in 5 years is unknown. Of course, the note the OP signs on an adjustable will specify the changes in the rate, if the index is a slow moving index and the margin is small, maybe the adjustable rate will work.
Ah, I should have clarified. (Thanks!)
My 5/1 ARM has a fixed rate of interest for the first five years. Each month, the bank looks at my principle balance and applies the magical math formula to figure out how much of my payment will be applied to the principle and how much wil be applied to the interest. Since I pay extra on the principle each month, the amount of interest calculated each month drops, sometimes significantly. But my mandatory payment stays the same each month. 