10 year ARM mortgage

[JayDogSmooth]

Hey I have a chance to refi from a 30 year fixed at 3.875 % to a 10 year ARM at 3.25 %. Monthly payment goes down $275 per month, but if I continue to pay what I’m paying now I’ll owe 65 k less on the principle than I’d owe if I didn’t refinance. Example below:


Current situation

Pay $1430 per month

Rate is 30 year fixed at 3.875 %

*** Will owe $175 k in 10 years


Proposed situation

Pay $1175 per month

Rate is 10 year at 3.25

*** Will owe 120 k in 10 years


My concern is rate jumps considerably and then I'll be paying 10 % in 10 years, not sure if there's a cap from year to year or what the situation is. Even if it jumps that high it will be roughly what I'm paying now considering I'll owe $150 k less on principle. What does everyone think?

 

[RBS05]

Are you saying that the rate is fixed for the first 10 years at the rate you're being offered, and then resets? Or is it fully adjustable on a more frequent basis (like annually)? Usually they're structured as, for example, 5/1 where your rate is fixed for the first 5 years and then resets every year after at the market rate plus a defined spread in your loan agreement.

You need to do more research on what you're being offered.

 

[jmc11201]

Typically the cap is 5% above what your rate is on an ARM...so 3.25% could go to 8.25% at max. Usually the first year the rate goes floating, it can adjust as much as that 5%. After that first year, the most it can go is up 2% (but never above the rate cap). If you pay down the debt sufficiently, even with a max rate jump, you might see your total payment stay flat, go up slightly, or go down slightly.

I'm doing a 10YR ARM (got it in mid-2012) and I'm paying aggressively enough such that I'll either have the mortgage paid off in 10 years or the balance will be sufficiently low that even a rate jump would make my payments go down (higher interest on a lower than expected balance).

 

[jmc11201]

Are you saying that the rate is fixed for the first 10 years at the rate you're being offered, and then resets? Or is it fully adjustable on a more frequent basis (like annually)? Usually they're structured as, for example, 5/1 where your rate is fixed for the first 5 years and then resets every year after at the market rate plus a defined spread in your loan agreement.

You need to do more research on what you're being offered.

He is saying fixed for 10 years, then adjustable. Same structure as the 5/1, but it is a 10/1.

 

[StyleKnight]

That's pretty low for a 30 year fixed.

 

[jmc11201]

That's pretty low for a 30 year fixed.

True. Other questions...how long do you intend to stay in the house? How old are you?

If you plan on being in the house until you die and are fairly young, the 30 year isn't a bad deal. If you are young and intend to move, the 10/1 ARM is probably the right move. If you are older and don't want a mortgage in retirement, and have the capacity and willingness to pay off your mortgage more aggressively, the 10/1 may make sense.

I know people say it is a good time to borrow, but it is always a good time to be debt free.

 

[RUskoolie]

Why would you do a 10 year ARM to save .625% on your loan? Do you plan on moving in 1-2 years? If so, do a 5 year ARM. ARMs are great for those that understand them, but I have a hard time jutsifying them in this interest rate enviornment. We are getting rates our grandparents got. Money can't get that much cheaper to justify an ARM if you plan on staying in the house long term.

 

[RU205]

You may be able to get a 2.9% on 15 year fixed. Might be worth looking into instead of a 10/1

 

[LevaosLectures]

He is saying fixed for 10 years, then adjustable. Same structure as the 5/1, but it is a 10/1.

Isn't the point of an arm usually to try to refi again before it resets?

 

[Sproul]

Why not just get a 15 year fixed at 3%? No surprises.

 

[_dave_]

At interest rates that low, don't pay extra and let it ride as long as possible. Invest what you can. In 10 years you'll have your house AND a nice large portfolio. Pay it off sooner and in 10 years you'll have your house and no or very small portfolio.

 

[jmc11201]

Isn't the point of an arm usually to try to refi again before it resets?

I wouldn't play that game with a 10 year ARM as rates are very likely to be higher in 10 years. You could have done that with a 5/1 ARM a few years ago and come out ahead, but that isn't a strategy I would recommend.

To me, the questions would be:

1. How long do you intend to be in the house?
2. How long until you plan to retire?
3. What is your risk tolerance and investing acumen?

If the answers to #1 is less than 10 years, I'd go with the ARM.

If the answer to #2 is less than 10 years and you can afford to pay off the mortgage, I'd go with the ARM.

If the answer to #3 is that you have some risk tolerance and have the discipline and investing acumen to consistently put the difference into an investment portfolio, over a 10 year period, you probably come out ahead. My personal preference is to get rid of the debt as I know if I have more cash flow, I'll probably not have the discipline to invest it every month and all that will happen is my consumption will increase.

 

[LevaosLectures]

Also, where in NJ can you buy a house and have an $1175 mortgage? (Assuming 20 down ). Nice.