pros/cons of 30 yr vs ARMSs?

Discussion in 'Credit Talk' started by Ender, Aug 13, 2003.

  1. Ender

    Ender Well-Known Member

    I am in the process of looking at homes.. should I go with a 30 year fixed? or an ARM? I realize this is dependent on how long I plan on living there, interest rates, etc.

    I know many lean towards the ARMs because of lower rates which equate to lower payments.. but what are the cons of this? Is it that the first year out of the fixed, that the interest rate could possibly jump up significantly?

    So let's say that there is a 3/1 ARM at 4.25%. By the 4th year, let's say the LIBOR is 7% and margin is another 2%. So the 4th year, the consumer can be charged 9%?? Then any year after can increase by 2% up to a certain cap specified in the loan agreement? Is my understanding correct?
  2. lakpr

    lakpr Well-Known Member

    That's exactly right ...

    I went through this number crunching myself in Feb this year, when I wanted to refinance. I was looking at 7 year ARMs vs. 15 year fixed ... and trying to see if I can pay off the mortgage faster with the lower interest rate in ARM before the interest rate shoots up ... I concluded that it isn't worth the risk and opted for 15 year fixed ...
  3. lbrown59

    lbrown59 Well-Known Member

    I concluded that it isn't worth the risk and opted for 15 year fixed ...
    ============It usually isn't.

    You can also pay the 30 off faster if you like just make the 15 year monthly payment.

    THE END ** *** ** LB 59
  4. Hedwig

    Hedwig Well-Known Member

    Rates are low now. They're not likely to stay low, so the fixed is the better deal, unless you're only going to be there a few years. As the rates go up, your ARM goes up, and you're sitting there wishing you had gotten that low rate fixed.

    If they ever go lower, you can always refinance.

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