Alrightly, I used the methodology I described earlier and have come to the following conclusions. Looking at the current low interest rate environment and what the eurodollar futures imply as the future path of rates, fixed loans are superior if you plan to pay-off the entire mortgage. But, variable rate loans definitely can save money if you only plan on holding the loan for 7 years or less. The ARM can even end up saving money if rates rise faster than anticipated given that you exit the loan within 5 years or less. Pretty much what is expected, but at least things have been quantified. For more details and to download the spreadsheet that calculates all this so you can input your own info, check out my blog (link provided in my profile).
Fixed versus ARM mortgage
- Thread starter LivingInVol
- Start date
Yup you've pretty much nailed it. When we bought our first condo the decision I was trying to choose between was to either take a 30 year fixed at 6.25% or an FHA 1/1 ARM that started at 3.00% with a 2% margin, 1%/yr adjustment cap, and a lifetime interest cap of 8%. We walked into the condo and asked my wife if we're going to be living here 10 years from now and she said no and I called our mortgage officer and told him I want the 1/1 ARM. However, I still make my monthly payment as if I am on the 30 year fixed mortgage which means my principal has dropped significantly faster taking the ARM than the 30 yr fixed. Of course people could invest that extra savings but I had decided to budget a certain amount for mortgage and I still pay that amount regardless of my monthly minimum payment.
My opinion is that if you are taking an ARM mortgage because you can't afford a 30yr fixed mortgage payment then you maybe setting yourself up for some problems down the line and should wait to buy, but if you can comfortably afford a 30 yr fixed you might be better off just taking an ARM and making extra principal payments and you should be okay. Of course make sure your Margin, caps, etc aren't too outrageous. And ALWAYS ask your wife if she's going to live in that darn house 10 years from now before making a decision
Quote from huh:
My opinion is that if you are taking an ARM mortgage because you can't afford a 30yr fixed mortgage payment then you maybe setting yourself up for some problems down the line and should wait to buy, but if you can comfortably afford a 30 yr fixed you might be better off just taking an ARM and making extra principal payments and you should be okay. Of course make sure your Margin, caps, etc aren't too outrageous. And ALWAYS ask your wife if she's going to live in that darn house 10 years from now before making a decision
That's a good point. If you can't afford the 30 year fixed you shouldn't be buying the house in the first place... The lure of these artificially cheap loans is one of the root causes of the whole mortgage crisis. Asking the wife is always highly advisable...