re: 5 year ARM 6% or 30 year loan for 6.875?

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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?

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I am seeing 6.125% on bankrate.com, 1.125% points, 30 yr fixed, WesLend financial for $400k loan. I don't think I would do a 5 yr ARM, I currently have a 7 yr ARM with 63 more months @ 1.625% until re-set rate which is capped at 6% for the life of the loan. I can easily pay it off at the rate re-set date or tomorrow. I agree that people seem to move much more frequently these days than in the past, so not sure a "forever" home has any certainty unless you were retiring to a place you love which is definitely not Houston to me. I think I refi'd my prior house 5x (initial rate was 8.75%), but we lived in it 26 years. If rates rose to 9% or higher at your re-set date you would kick yourself in the arse with the ARM.

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30 year. If it goes down, refinance. If it goes up, you’re safe.

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While this won't "win" every conceivable scenario, it will lose very few outright as well. This is the smart, measured answer. If interest rates stay flat, you hold. If interest rates spike, you've won. If interest rates drop, you have to eat some refinance costs, but you can mostly get even (to what you might have lost by not taking the ARM).

I would only ARM if I knew that interest rates had maxed out and were definitely headed down.

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I would only ARM if I knew that interest rates had maxed out and were definitely headed down.

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Eh I think you guys are way over rating a 30 year with the current rates. If you were saying a 15 year and get it paid off, sure.

Historically 8% or so is a good rate. OP’s ARM would likely be limited on how much it can go up. Again he would save $3000/ year for 6 years ok interest, and a refinance is $3000-4000. So realistically he has 7-8 years with rates staying flat for the ARM to make more sense. That’s not insignificant.

ETA: I say this without knowing the actually stats but I’d have to guess that something like 3-5% of people actually carry a 30 year loan full term.

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historically purchase prices aren’t remotely close to what they are today

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What’s that have to do with the situation though? Yes it’s more expensive for sure. The reason I pointed out the 8% is because historically it’s statistically unlikely rates go much above 8%, so if he locks in 6% it’s not very likely rates go much above 8%. One of the reasons 8% is a pretty good ceiling is because private equity could lock in loans at 5-6% at that which many people would be very happy with.