#HomeLoan #ARMvsFixedRate #MortgageDecisions
Hey there! 🏡 Choosing between an Adjustable Rate Mortgage (ARM) and a 30-year Fixed Mortgage can be a tough decision. Let’s dive into the details to help you make the best choice for your unique situation.
What is a 5/6 ARM?
A 5/6 ARM is an Adjustable Rate Mortgage with a fixed interest rate for the first 5 years, then adjusts annually based on market conditions. It typically offers a lower initial interest rate compared to a 30-year Fixed Mortgage.
Why Choose a 30-year Fixed Mortgage?
Here are some reasons why opting for a 30-year Fixed Mortgage may be a smart move:
– Predictable monthly payments
– Protection against interest rate hikes
– Peace of mind with a fixed rate for the entire loan term
Factors to Consider:
When deciding between a 5/6 ARM and a 30-year Fixed Mortgage, consider the following:
– Your financial goals and stability
– Current interest rate trends
– How long you plan to stay in the home
– Your risk tolerance
Real-life Example:
Imagine you plan to stay in your home long-term and value stability in your monthly payments. In this case, opting for a 30-year Fixed Mortgage could provide peace of mind and financial security.
Remember, there is no one-size-fits-all answer when it comes to choosing a mortgage. It ultimately depends on your individual circumstances and financial goals.
In conclusion, don’t second-guess yourself for choosing a 30-year Fixed Mortgage over a 5/6 ARM. Trust your instincts and make the decision that aligns with your long-term financial plans. Good luck on your home loan journey! 🌟
> and it seems pretty clear rates will drop within 5 years
I see this assumption thrown around all the time as if 0.50% was the proper rate and rates should be dropping again soon. I doubt it.
There are literally MOUNTAINS of commercial real estate loans and bonds along with $Trillions in government bonds coming due this year. With Russia and China starting their own economic bloc don’t expect all this debt to roll over with ease. When bond auctions fail the FED is forced to buy the debt and drive rates UP.
Don’t assume that rates will drop again .. in your life time.
Rates are not guaranteed to fall within the next 5 years. You should make a decision you can live with for the long run. Don’t count on changes to macroeconomic factors to bail you out–that’s a recipe for disaster.
Personally I would take the fixed rate, because I remember the stories about people getting crushed by ARMs during the 2008 housing crisis. It may be irrational, but if I could afford the fixed rate, I would do that and sleep soundly at night.
Yeah, I’d take 3/8 of a point to make sure I’m not losing out on 3 points down the road too.
Like, the problem is if it _does_ go up, what are you gonna do, refi to a low interest rate when rates are even further up? I don’t think so.
Fixed rate all day long. Buy once, cry once.
Fixed rate
Pay a little extra
And if you’re in the home for the long haul the interest paid will even out
Fixed rates are always a safer bet. Remember the 2008 housing courts which absolutely obliterated millions of American homeowners? That crisis was largely fueled by ARMs.
Fixed rate. You can refinance if the rates drop. But you won’t be caught with your pants down if they go up.
Interest rates are still below historical averages. It is a dumb assumption to think that they will drop dramatically.
>it seems pretty clear rates will drop within 5 years
Where did you get this information. My sources says it’s pretty clear rates will drop, it’s the within 5 years part that is highly speculative. No one knows when this will happen. Could happen in 5 and could happen in 30. I’d choose the 30 year fixed all day long. For such a small percentage rate discount, it’s a huge risk.
How much to buy the 30 year fixed down to 6.625? Might be worth it since it looks like you have a little wiggle room.
Fixed. If rates drop like you think, refi then.
Look, you would *probably* be fine in the ARM. Rates will *probably* come down a little to the point that you’d be able to refinance, and your house will *probably* appreciate (or at the very least not depreciate) to facilitate that refi, and your 23% down will *probably* mean that always have enough equity in the house to do what you want when the time comes.
That being said, nobody can predict the future. A friend of mine bought in ’04/05 and was underwater on their home for the next decade. Yes, her home didn’t get back to where she bought it at until 2015. She changed jobs, got a divorce, and still had the house tied around both of their necks.
Shit happens. It probably won’t, but it might. That 0.375 difference is what you’ll pay for the peace of mind, if you opt for the fixed rate. And honestly it’s up to you.
Personal finance media/forums tend to be very risk adverse. You expose yourself to risk with an ARM, but it’s much more likely to save you money over the long term.
See page 20 of this report for an explanation of why Yale economist James Choi recommends ARMs – https://www.nber.org/papers/w30395
We got our house with a 5/5 ARM back in 2014. Then in 2019 rates dropped and I got an even lower payment. YMMV it’s always a risk.
I like ARMs but I don’t think that’s enough of a difference. My 7 year ARM was 0.75% less than the fixed rate. Don’t think I would’ve done it at half that difference
Not enough difference to drag me towards the ARM, but then again I’m old enough to remember the days of double digit interest rates in the UK.
thats a small difference to risk an ARM. There are times it makes sense, but if the goal is to refinance anyway, the fixed is safer (and often has lower fees).
Fixed rate. No one can predict the future, it’s seems likely rates will drop but it’s not a sure thing.
ARMs scare me. I did a 10/1 ARM during the run-up to 2008 and refi’d out of that as soon as the rates made sense.
How do the loan fees/costs compare? Are there any points involved?
I have been pricing out home loans occasionally. Does that 7% require discount points?
I don’t see anyone asking how long you plan on staying in this house. Is this a “starter home” and you want to move to something bigger 5-7 years down the road? Is this a “forever home” that you want to be in for 15-20 years?
Obviously no one can predict the future so even if you plan on selling in 6ish years, you might get stuck due to life or market circumstances. But if the plan is shorter term, that’s the scenario where ARMs make sense.
But honestly the rate difference/payment difference are pretty small here. Personally I’d pay the extra $1400/year for the added security of a fixed rate.
Fixed Rate is always better than ARM unless you have very specific reasons to do the ARM.
Adjustable just means it will change.
The prime rate could drop 2% between now and then and your rate can still go up.
Would never go for an ARM. In fact, when you close look at the disclosures. Your realtor, the title company, and anyone else involved will have you sign a form about ARM’s even if you have a fixed loan.
Should. Not. Be. Legal.
Fixed rate is really nice and predictable. You can refinance if you change your mind. Canadians wish they had fixed rate mortgages.
I took ARM last year
Will pay off in 7 or less put a bunch down
Not dumb at all. In fact, I think it’s a wise choice. The peace of mind you get with a fixed rate, especially in a volatile market, is invaluable. If rates drop as you anticipate, refinancing could still be an option without the pressure of a looming adjustment period.