Hi all, I need some solid advice. My wife and I are currently approved through Countrywide for a 30 year fixed rate loan. The terms of the loan are an 80/20 with the second being a interest only heloc. This is a no downpayment loan in the amount of 350k. The 1st would be 280k, the second being 70k. We both have fico scores that are in the low 700's. Due to the loan being a 100% financing loan, the 30 year fixed rates are higher. We were quoted 6.5 %, which is a bit steep in todays world. We just initiated a builders rate cap due to our house being under construction. The house is currently on schedule to be finished in 2 months. What the rate cap means is that if the rates were to go up past 6.5%, I would be given the chance to buy it at 6.5%. I am also able to float down 1 time, however, only 2 weeks prior to closing. I had never thought of doing an adjustable until recently. I know that rates are at historical lows and can only increase on the adjustable. The adjustible mortgage we are considering is a 5year fixed ARM. I believe the rates on the 5 year ARM with no down is currently hovering around 5-5.2%. If I went with the arm, I would save approximately $250/month on the 1st mortgage alone. The second would be the same in either case, currently 6.75%. I know that after 5 years, the rates will be higher. However, im the meantime, I would have saved $250x60=$15,000. Even if rates were higher after 5 years, couldnt I simply refi into another ARM? I would appreciate all input. Would you do the ARM or the 30 yeare fixed? In addition, while this is a brand new house, I would be tempted to buy something new in 5 years. I live in Monterey County, CA btw. Thanks!
Don't assume the rate on the ARM will be higher. The initial rate may be 5%, but these products usually come with a margin of about 2.25% and the index right now is 1.3%. In english, that means that in todays market, those that have these adjustable rates and are in the adjustable part of the loan are paying about 3.8% interest. Does this sound like a good deal for you? From what you've said so far, it sounds like something you should consider. So long as you're comfortable with the risk and understand what you're doing, go for it.
3.8% sounds great to me I think the question comes down to, Do I want to gamble with the rates? I'm almost certain that 5 years from now, the rates will be higher. I wonder if there is a place where we could look at interest rates for ARM's in the past 10 years or so. Thanks for the input.
The cost of capital goes up, the cost of capital goes down. If you dont like the premium for fixing for 30 years, the do it for a shorter period, like 5 or 10 when you will have knocked the principal down and inflation will have sent your income up! JP
Re: Re: need input re: ARM vs. Fixed mortg As a matter of fact, there are planty of sources for this information, here is one of my favorites: http://www.hsh.com/indices/prime00s.html This goes directly to a history of the Prime rate, but on the left hand side of the screen there are buttons to look up other indexes as well. Treasurey bills and LIBOR are the most common indexes for ARM mortgages. If you're considering one, ask your lender what index will be used and how much the margin is. When you're looking at the history, add the margin to the index to get an idea of where the rate was for any month/year. Hope this helps you with your decision.
