ARM vs. Fixed?

[Amythyst]

Hi all, question... I just locked in my fixed rate for 80 days at 3.75% for an FHA loan.  Originally, we were quoted at 3.25% so, I was very sad to see the rate had gone up so much.  We are doing new construction, so we were not able to lock in our rate till now.  We aren't closing till August 30th still, but the lender was nice enough to let me do an 80 day lock in with no fee.

I am considering though going with their 5/1 ARM option which the rate for that is currently 2.8% ... I don't have to decide now... he said that once I'm about 50 days from closing we can look at the rates and if the fixed rate has come down any, I get a 1 time chance to lock in at a lower fixed rate.  Or, I can decide to lock in an ARM rate.

I am considering the ARM for 1. lower payment and 2. in 5 years, my Chapter 7 BK will be off my credit reports completely and I'm thinking it might be possible to refi into a conventional?  We also have some loans that should be paid off in 5 years as well.

My husband has also not been able to work due to some major surgeries over the last year or so, so its just my income right now... so, it would be a nicer cushion to have a bit lower monthly payment until he can start working.

Anyways, I wanted to see what the community thought and if I'm missing any sort of key point that should deter me from doing the ARM.  We can afford either one... but the ARM would probably give us a little more money at first to also get some of the furnishings and things we want.  I don't want to put anything on credit cards, so being able to have the extra cash each month I think would help.

The home is gonna be roughly 397,620 and at the 3.75% the monthly payment is 2,571.00  P&I of 1,808.08, Hazard Insurance 75.00, Taxes 291.51 and PMI 396.34

When I had the 3.25% rate quoted - the monthly payment was 2,426.00

Does anybody know (approximately) what the payment would be if it dropped down to the ARM rate of 2.8%?

[pdog661]

With an ARM you need 10% down.  From your PMI number it does not appear that you are putting 10% down. 

I would say with 10% with a purchase price of 397720 your monthly payment would be roughly (+ or - 30 bucks) 2009.89.

not a professional though so contact a LO.

GL to you. Hope it works out.  

[Amythyst]

This is an FHA ARM and my loan officer did not mention anything about the downpayment changing from 3.5%.

[oscar_actuary]

I used the figures you supplied and deduced that the loan amount was 96.5% of $397,620, or $383,703.  That gets us really close to your quoted P&Is.  So, presuming the ARM is amortized over 30 years and PMI stays at 396, your total payment would be $2339.  $1577 of that is P&I

[oscar_actuary]

I understand you may have extenuating circumstances; but I'd really think twice about passing up 3.75% fixed for 30 ys just to save $90 / month for 5 years.  I just base this on my conservative nature and the fact interest rates are well below historical norms.

[Amythyst]

Thanks for the replies and the calculation!

If it was somewhere around 2300ish vs. 2571.00 - that's more than 90 bucks...its almost 300. 

Definately food for thought.

[RockinRay]

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@oscar_actuary wrote:

I understand you may have extenuating circumstances; but I'd really think twice about passing up 3.75% fixed for 30 ys just to save $90 / month for 5 years.  I just base this on my conservative nature and the fact interest rates are well below historical norms.

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+ 1 - I think in the "long term" we are going to see rates rise a little faster then they have been. The trend over the past weeks is all up...

Take the 3.75 and be done with it. That is an excellent rate!

Look at it like this, you can always re-fi down the road if the rates move way back down....

[adymax]

Don’t do ARM loan. We are in the same boat as you. We have a contract to start building a new house and we got an FHA with down payment assistance rate of 4.25%. Without assistance would be 3.75% but we prefer more cash in our packets to buy appliances and what is need for a  new home.  We don’t know what the rate will be in 6 month when we do the closing. Take 3.75% rate and move on.

[Amythyst]

So the only argument against an ARM is strictly the rates will probably be much higher in 5 years?  No other loopholes or anything to be concerned with? 

And after 5 years, I would expect the rate to go up by 1-2% right?

[adymax]

From my understanding  with ARM rate can go up 1% every year up to 5% plus after 5 you have to do a refinancing probably with a higher rate and more closing costs.Read here:  http://www.zillow.com/advice-thread/Trying-to-decide-between-an-FHA-5-1-ARM-and-an-FHA-30-year-fixed...