30 year fixed vs ARM

byenare · Post by **byenare** » Tue Feb 09, 2016 11:00 pm

Hello All,

Currently my mortgage is at 3.25% with 7/1 ARM. Its been 1 and half year on this mortgage. I am happy with this loan. Since the interest rates are going down, friends are converting it to 30 year fixed. After shopping with couple of lenders, I got 2 options:

1) 3.625% with 30 year fixed
2) 2.875% with 7/1 ARM

Now I am confused with which option to take? With another 7/1 ARM, I am going to save $160 per month. With 30 year fixed - my monthly amount is going to be same.

Which one you recommend and why?

Note: This is a non confirming loan in CA.

Thanks!

r2i_in_2yrs · Post by **r2i_in_2yrs** » Tue Feb 09, 2016 11:48 pm

byenare;622431Hello All,

Currently my mortgage is at 3.25% with 7/1 ARM. Its been 1 and half year on this mortgage. I am happy with this loan. Since the interest rates are going down, friends are converting it to 30 year fixed. After shopping with couple of lenders, I got 2 options:

1) 3.625% with 30 year fixed
2) 2.875% with 7/1 ARM

Now I am confused with which option to take? With another 7/1 ARM, I am going to save $160 per month. With 30 year fixed - my monthly amount is going to be same.

Which one you recommend and why?

Note: This is a non confirming loan in CA.

Thanks!

What are the total fees for each option? Is that 0$ closing cost?

To have peace of mind, I would go with 30 year fixed.

Desi2return · Post by **Desi2return** » Tue Feb 09, 2016 11:57 pm

byenare;622431Hello All,

Currently my mortgage is at 3.25% with 7/1 ARM. Its been 1 and half year on this mortgage. I am happy with this loan. Since the interest rates are going down, friends are converting it to 30 year fixed. After shopping with couple of lenders, I got 2 options:

1) 3.625% with 30 year fixed
2) 2.875% with 7/1 ARM

Now I am confused with which option to take? With another 7/1 ARM, I am going to save $160 per month. With 30 year fixed - my monthly amount is going to be same.

Which one you recommend and why?

Note: This is a non confirming loan in CA.

Thanks!

I was in a similar boat last year around May time frame. I had 3.62% on 30 Fixed. I shopped around and got a 10 Yr ARM for 3.0%. I ended up taking 3.0% ARM. I want to own the house in 10 Yrs hence I opted for this choice. My goal is to completely pay off the mortgage in the next 10 years so that by the time I retire (long way to go if I LIA) I don't have to worry about housing.

Long story short, my suggestion would be to first figure out what you are going to do with the house, i.e. how soon do you want to pay it off? If you want to pay it off in the next 30 yrs, then go for the 30 Yrs Fixed. If you are ambitious and want to pay it off sooner then go with ARM.

Hope this helps!

triveni · Post by **triveni** » Wed Feb 10, 2016 12:33 am

we did go with the 10/1. I am not very regular on the forums these days. but each time i pop in i see some of my old posts active. Like this one and the other posting on dengue :)

ILuvHyd · Post by **ILuvHyd** » Wed Feb 10, 2016 5:10 am

If we go with law of averages, one lives in a house ~7 years, so 7/1 ARM makes sense unless you have a strong reason to stay in this home longer.

The relatively lower long term interest rates are also an indication of future interest rates, so I wouldn't worry too much about long term interest rates sky rocketing.

Disclaimer: I formed my above assumptions reading this interesting and sometimes rather elaborate and academic book which I recommend to our dear forum members here.[h=3]Capital in the Twenty-First Century - Amazon.com[/h]
In a nutshell, growth rates which drive inflation and interest rates have been relatively low in 18th and 19th century barring some periods in later half of 20th century. Author believes we might return to the former in future.

DesBhakt · Post by **DesBhakt** » Wed Feb 10, 2016 5:34 am

FYI, specific to refinancing the mortgage might change from non-recourse to recourse debt. (Although this is an extreme situation & also most people today are probably paying 20% down for a home.)

https://apps.irs.gov/app/vita/content/36/36_02_020.jsp

http://www.nolo.com/legal-encyclopedia/whats-the-difference-between-recourse-nonrecourse-loan.html

byenare · Post by **byenare** » Sat Feb 13, 2016 1:01 am

I have decided to go with another 7/1 ARM for refi because of these reasons.

1. Low interest rate: This is saving me some additional dollars every month, which I can use to pay that amount towards principal (~$200 each month).
2. I might not stay in this home permanently, so why lock in rate for 30 years and pay extra dollars towards interest.
3. By going with 7/1 ARM, I can pay extra 2K (approx) per year towards principal. Even if I stay 5 years in this home, I will end up paying 10K extra principal compare to 30 Year fixed rate.
4. Currently I have completed around 20 months in 1st ARM. By doing another 7/1 ARM, I am technically enjoying ARM rates for almost 9 years..

Any cons I should be aware of with this approach? Thank you all.

ILuvHyd · Post by **ILuvHyd** » Sat Feb 13, 2016 2:06 am

byenare;622835
Any cons I should be aware of with this approach? Thank you all.

The only con is very low probability of sky high interest rates after 7 years when you have to refinance. The cost of refinance will easily be offset by the savings of 7/1 ARM. I am doing the same as you though mine is 5/1 ARM as 7/1 ARM which is ideal for me too was not offered by the choice of my bank at that time.

realgoogler · Post by **realgoogler** » Sat Feb 13, 2016 2:23 am

ILuvHyd;622841The only con is very low probability of sky high interest rates after 7 years when you have to refinance. The cost of refinance will easily be offset by the savings of 7/1 ARM. I am doing the same as you though mine is 5/1 ARM as 7/1 ARM which is ideal for me too was not offered by the choice of my bank at that time.

How do you measure the cost of refinancing ? That fact you have to refinance pushes the loan by so many years. In the early year you mostly pay interest anyways. Banks are happy to collect your interest payments while we are getting a steal of tax deduction from IRS :)

ILuvHyd · Post by **ILuvHyd** » Sat Feb 13, 2016 2:41 am

realgoogler;622845How do you measure the cost of refinancing ? That fact you have to refinance pushes the loan by so many years. In the early year you mostly pay interest anyways. Banks are happy to collect your interest payments while we are getting a steal of tax deduction from IRS :)

Very true and good point. We have to keep an eye on the amortization period and keep it constant across all options to make the comparison apples vs apples.

Also OP is smart, he wants to pay off the principal with the savings of lower interest ARM. I believe he's on the right path.