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re: 5 year ARM 6% or 30 year loan for 6.875?
Posted on 3/17/23 at 9:42 am to meansonny
Posted on 3/17/23 at 9:42 am to meansonny
What about the ones who elected for the ARM in 2018 and now are facing rising rates? Where those who went for the fixed are still sitting pretty at sub 3%. Of course the ARM looks good from past data. We’ve been in historic lows for rates in that time frame you posted. I agree there’s a place for ARM, but in the current environment I don’t know of any rate that would make me choose an ARM over a fixed for my forever home.
1
Posted on 3/17/23 at 9:57 am to GAFF
If they had a 5 yr arm in 2018, they probably locked in 3.5% to 4.0% depending upon the month that they locked. Rates spiked up in 2018. 30 years capped over 4.875% (do you remember Trump bitching? Then they went back down)
The rate today would be 2.125% to 5.25% depending upon what month they got the mortgage.
If they started sept 2018, they could be at 4.0% for the next 6 months. December 2018, 5% for the next 9 months. March 2018, 5.25% for the next year.
Some mortgages have a 1% or 2% period cap (so it can't jump up or down more than 1 or 2% when it resets). Some mortgages don't.
Again... the 30 year rates in 2018 peaked at 4.875% (september). So the rate on a 5/1 Treasury arm today would still be lower than the 30 year fixed from September 2018.
Edit to add: I'm calculating the 1 year Treasury adjustment for 2023. However most of those 5/1 arms from 2018 haven't adjusted yet.
Still... under the premise that they were locked in for 4 years, my post above would illustrate how they adjusted when a fixed term expired in 2022 or 2023.
The rate today would be 2.125% to 5.25% depending upon what month they got the mortgage.
If they started sept 2018, they could be at 4.0% for the next 6 months. December 2018, 5% for the next 9 months. March 2018, 5.25% for the next year.
Some mortgages have a 1% or 2% period cap (so it can't jump up or down more than 1 or 2% when it resets). Some mortgages don't.
Again... the 30 year rates in 2018 peaked at 4.875% (september). So the rate on a 5/1 Treasury arm today would still be lower than the 30 year fixed from September 2018.
Edit to add: I'm calculating the 1 year Treasury adjustment for 2023. However most of those 5/1 arms from 2018 haven't adjusted yet.
Still... under the premise that they were locked in for 4 years, my post above would illustrate how they adjusted when a fixed term expired in 2022 or 2023.
This post was edited on 3/17/23 at 10:03 am
Posted on 3/17/23 at 10:16 am to meansonny
Seems you’re picking the low rates for the ARM and the peak rates for fixed. Many people received fixed rates sub 4%. Today that fixed rate is still the same. As you said, those who elected for the ARM are now paying 4-5.25%. Using your peak rate of 4.875% for the fixed, the ARM is already in the same range with 25 more years of possible increases to the go. Those who went fix are paying 4.875% regardless.
Posted on 3/17/23 at 10:32 am to GAFF
quote:
Seems you’re picking the low rates for the ARM and the peak rates for fixed
I literally picked the rates for 2018 which was the scenario given.
Mortgage rates dropped in 2007/2008 so I picked a 5 year rate option that would adjust with those fixed rates dropping.
The point lost by many is that the 5 year fixed arm (the first 5 years) is lower than the 30 year fixed for the first 60 months.
The point to point adjusting rate will be most likely significantly lower than the 30 year fixed rates available at that time.
"If rates go down, you can refinance"...
If rates go down, you don't need to refinance on the arm.
My entire point is that for some stupid reason, America is driven to get 30 year mortgage rates when the primary use of a mortgage is about 48 months.
Back in 2003, I bought my first home with a 6 month LIBOR. There was no 5 year fixed period. Every 6 months it adjusted.
They were also known as interest only loans.
However I made the same payment on the lower interest rate than I would have a 30 year fixed mortgage. I got out of PMI (paid down my mortgage balance to 78% of the purchase price) in just over 24 months. A year later, I had enough equity to sell and buy a home 50% more expensive with a 20% downpayment.
I was only in the home for about 40 months. I didn't know what my plans were when we bought. But I knew that I could hammer down principal on the 6 month LIBOR at the time.
Do rates go up? Yes.
Can they go above 10%? Yes.
I'm probably worried about of other things too regarding the economy and my role in it if that happens.
Posted on 3/17/23 at 11:01 am to GAFF
quote:
Seems you’re picking the low rates for the ARM and the peak rates for fixed. Many people received fixed rates sub 4%. Today that fixed rate is still the same. As you said, those who elected for the ARM are now paying 4-5.25%. Using your peak rate of 4.875% for the fixed, the ARM is already in the same range with 25 more years of possible increases to the go. Those who went fix are paying 4.875% regardless.
Whatever the fixed rate was in 2018, the 5/1 ARM rate was about 0.75% lower.
It can't be any plainer than that for 60 months (which would be the case today for any loan started after April 2018).
The 1 year Treasury today is 4.49%
So a 0.25% margin would net a 12 month locking period at 4.75%.
The 30 year fixed rate March 2018 was 4.5%.
The 1 year Treasury in January was 4.89%. So a point to point lockin would have been about 5.125% for the next 12 months (the 30 year rate January 2018 was about 4%. The 5/1 lockin rate for the first 60 months would have been about 3.375%).
I'm not hiding anything.
Posted on 3/17/23 at 11:21 am to meansonny
I get that you pay a lower rate and save on the first 60 months of interest. No doubt about it. ARM wins that battle. My argument is what about the next 25 years? The 30 year fixed already overcame the rate within 5 years. If you're in and out within 5 years then sure the ARM is the way to go. If it's your forever home as the OP stated the ARM just doesn't make sense to me. All those who elected for a ARM can toot their horn about paying less the first 60 months but I'll sleep peacefully at night knowing my next 25 years are already budgeted and prepared for. Imagine paying 10% for a mortgage because you wanted to save .8% vs the fixed rate in the beginning.
Posted on 3/17/23 at 11:53 am to GAFF
quote:
If it's your forever home
Forever home or not, these are not forever mortgages.
The average duration of a mortgage is about 48 months.
How long have you been in your current mortgage?
How long were you in the one prior to that?
quote:
Imagine paying 10% for a mortgage because you wanted to save .8% vs the fixed rate in the beginning.
The 1 year Treasury was last at 9.75% back in 1984.
Now who is cherry picking data to make a point?
quote:
The 30 year fixed already overcame the rate within 5 years
Lol. No it didn't. You need to study up on time value of money, effective rates, or APR. The first 5 years are the most impactful for any interest bearing venture.
Posted on 3/17/23 at 12:04 pm to meansonny
So you’re telling me that if you were about to purchase your forever home you’d go with the 5/1 ARM at 6% vs the 30 year fixed at 6.875%? That’s all this conversation boils down to.
Posted on 3/17/23 at 12:11 pm to GAFF
quote:
So you’re telling me that if you were about to purchase your forever home you’d go with the 5/1 ARM at 6% vs the 30 year fixed at 6.875%? That’s all this conversation boils down to.
With rates already this high you're sacrificing an extra .875% interest for security in case there is an apocalyptic level financial event. The rates are already bad.
Most analysts/smart people whose opinions I value I've seen have us getting back down to 4-5% worst case scenario by 2025 and some are saying 2024. That's well within the 5 year window of the ARM.
I'm not gonna say rates can't go higher, they have been higher and could. But all we can go on is what we know and what we know is the data for the future looks at least moderately promising and that there looks to have been a ceiling to rates around the 7% mark so far.
Also if you're on this board to begin with you're more active in money management than 95% of homebuyers. You aren't gonna sit there be surprised you're going from 6% this year to 10% in 5 years or something. You'll refinance well before that point.
Posted on 3/17/23 at 12:16 pm to GAFF
quote:
So you’re telling me that if you were about to purchase your forever home you’d go with the 5/1 ARM at 6% vs the 30 year fixed at 6.875%? That’s all this conversation boils down to.
If I qualified for 0.25% over the fixed index, probably yes.
Back in 2003, I bought what I thought would be a forever home (3 side brick 2 story in a great neighborhood). With 5% down, I got a 6 month LIBOR + 0.75% margin. I got out of PMI in 2 years. Rate was about 1.125% lower than 30 year fixed at the time and reset every 6 months. Some resets it went up. Some it went down.
Posted on 3/17/23 at 4:04 pm to meansonny
OP left an important detail out, what's the mortgage amount?
This is what I'd personally do OP.
1.) How much are you saving in 5 years with the 6%?
2.) How much is the cost of refinancing?
3.) When would you refinance if you get the ARM?
4.) What's your risk rates go up and how much would they have to go up for the ARM to be a bad decision?
Also, with a forever home are you planning on holding a 30 year mortgage? Or potentially paying off sooner?
This is what I'd personally do OP.
1.) How much are you saving in 5 years with the 6%?
2.) How much is the cost of refinancing?
3.) When would you refinance if you get the ARM?
4.) What's your risk rates go up and how much would they have to go up for the ARM to be a bad decision?
Also, with a forever home are you planning on holding a 30 year mortgage? Or potentially paying off sooner?
Posted on 3/17/23 at 4:22 pm to baldona
I think there are 2 critical points left undisclosed.
1) what are you doing at the 6% rate? When I took the 6 month LIBOR, I paid the same monthly amount that I would have paid into the 30 year fixed rate. Essentially, I paid a ton of money down in the first years of the 30 year mortgage that even when the rate came up to the 30 year fixed rate I was still coming out better because my policy balance was significantly lower.
Is he investing that difference? What is he doing with that difference in payment.
2) when would he refinance out of the ARM. Ironically in a lower rate environment, it is counter intuitive to refinance because the adjustable rate will almost always be lower than a 30 year fixed rate at that time. What is the strategy to exit the arm (if he would have one)?
My last point is just an illustrated example of why the average duration of a mortgage is 4 years.
In 2003, we bought a 3 sided brick home in a s/d surrounded by much more expensive homes. The s/d entrance was across the street from my in-laws. This was intended to be our forever home.
My inlaws sold their home and moved. And it didn't take long for my wife to tell me that we were moving closer (again) to her folks. But it could have been a job change that relocated me (there have been lots of changes in the economy over the past 20 years).
I was in that forever home (forever mortgage) for 3.5 years.
My next home, I was in that mortgage for 6 years. I was in the following mortgage for 4 years. And I paid off the third mortgage in 3 years.
I've asked a few times how long people have been in their current mortgage. No one steps up and truthfully answers.
1) what are you doing at the 6% rate? When I took the 6 month LIBOR, I paid the same monthly amount that I would have paid into the 30 year fixed rate. Essentially, I paid a ton of money down in the first years of the 30 year mortgage that even when the rate came up to the 30 year fixed rate I was still coming out better because my policy balance was significantly lower.
Is he investing that difference? What is he doing with that difference in payment.
2) when would he refinance out of the ARM. Ironically in a lower rate environment, it is counter intuitive to refinance because the adjustable rate will almost always be lower than a 30 year fixed rate at that time. What is the strategy to exit the arm (if he would have one)?
My last point is just an illustrated example of why the average duration of a mortgage is 4 years.
In 2003, we bought a 3 sided brick home in a s/d surrounded by much more expensive homes. The s/d entrance was across the street from my in-laws. This was intended to be our forever home.
My inlaws sold their home and moved. And it didn't take long for my wife to tell me that we were moving closer (again) to her folks. But it could have been a job change that relocated me (there have been lots of changes in the economy over the past 20 years).
I was in that forever home (forever mortgage) for 3.5 years.
My next home, I was in that mortgage for 6 years. I was in the following mortgage for 4 years. And I paid off the third mortgage in 3 years.
I've asked a few times how long people have been in their current mortgage. No one steps up and truthfully answers.
Posted on 3/17/23 at 6:17 pm to meansonny
quote:
I've asked a few times how long people have been in their current mortgage. No one steps up and truthfully answers.
I agree with you, but just to clarify your argument for mortgage time is the 6 year ARM right?
Posted on 3/17/23 at 6:33 pm to baldona
quote:
OP left an important detail out, what's the mortgage amount? This is what I'd personally do OP. 1.) How much are you saving in 5 years with the 6%? 2.) How much is the cost of refinancing? 3.) When would you refinance if you get the ARM? 4.) What's your risk rates go up and how much would they have to go up for the ARM to be a bad decision? Also, with a forever home are you planning on holding a 30 year mortgage? Or potentially paying off sooner?
Loan is for 355k. 6% ARM is for 25 years and saves 150k if I don’t pay extra on the 30 year. I plan on paying minimum of one extra note per year so minimum I could save 6 years of payments and around 125k long term. If I went with the ARM, I refinance every 5 years for 1k each for 25 years.
With that being said, I’m leaning towards the 30 year at 6.875. Refinance if it goes down and have peace of mind. The amount of money I would be saving with the ARM is not worth the stress of watching interest rates with what’s been happening. If I pay more towards principal like I plan, I save just as much long term.
This post was edited on 3/17/23 at 6:38 pm
Posted on 3/17/23 at 6:53 pm to baldona
quote:
I agree with you, but just to clarify your argument for mortgage time is the 6 year ARM right?
I don't quite understand the question.
I personally bought a 6 month LIBOR back in 2003. No "fixed time". It just reset the rate at LIBOR +0.75% every 6 months (if I had more equity, I qualified at the time +0.25% margin).
He is looking at a 5 year arm (60 month fixed rate at 6%). After 60 months, it adjusts. He didn't know what the index or margin was. The sales rep told him "whatever the bank wants to charge for that product at that time" which is sketchy as shite and I don't recommend.
If you can get a good index and good margin, the ARMs are fantastic loans.
The 1 yr Treasury today was 4.49%.
So if it was adjusting already at a 0.25% margin, the rate would be 4.75%. There is plenty of room for the Treasury to go up and touch the current 30 yr fixed rate (6.875%). As I said, the current adjusted arm rates are always lower than the current fixed rates.
If he was in the ARM, at would point would he bail? It is tough to do, mentally.
Posted on 3/17/23 at 8:20 pm to meansonny
quote:
don't quite understand the question.
You have repeated that the avg mortgage is 48 months, which is true and I agree with. Just going off the avg if he keeps the mortgage for 48 months he’s much better with the ARM.
It’s really not even a question if the rate difference is .875% and the OP is loaning $350k, a new refinance is usually what like $4,000 on $355k?
It’s a no brainer to me for the OP to go with the 6%. I don’t see anything that suggests the rates will be over 8% in 6 years without a doubt. He’s going to save $3000/ year right?
This post was edited on 3/17/23 at 8:21 pm
Posted on 3/17/23 at 11:34 pm to shoelessjoe
quote:
5 year ARM is cheaper by $44 a month.
Pay the additional $44 on the ARM, and you will save a lot more money in almost every possible scenario.
Posted on 3/18/23 at 5:52 am to Hopeful Doc
quote:
Pay the additional $44 on the ARM, and you will save a lot more money in almost every possible scenario.
How is the ARM only $44 cheaper with .875 rate difference? I’m clueless on ARMs to be fair, but if he is loaning $350k it should be much more then that?
Posted on 3/18/23 at 9:03 am to baldona
quote:
How is the ARM only $44 cheaper with .875 rate difference? I’m clueless on ARMs to be fair, but if he is loaning $350k it should be much more then that?
ARM is 25 year amortization, fixed rate is 30 year.
Posted on 3/18/23 at 10:51 am to shoelessjoe
quote:
5 year @ 6% would save 150k over 25 years vs 30 year loan. 5 year ARM is cheaper by $44 a month. Closing cost is $3500 cheaper for the 5year and 1k every five years to refinance.
30 year loan does give more peace of mind that we can secure that interest rate and it can’t go higher. 5 year allows us to refinance at anytime with another bank if want to. What should I do?
Do 15 years
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