Considering a 10 yr ARM over a 30 yr fixed mortgage.

ARM around 3.13% vs 3.875% on a 30 yr fixed.

Would like to tear down and rebuild in 10 yrs so timing would be right.

Any thoughts on ARMs? Any horror stories? Been reading on them and sounds like as long as you understand margin, index, initial year cap, max cap, etc., you can save quite a bit of interest, pay down more principle, and have lower monthly payments. Any advice welcome and appreciated.

Do you mean sell in 10 years? If so, that may not be a bad idea. I like the 30 yr because you have much more flexibility in case things change.

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Do you mean sell in 10 years? If so, that may not be a bad idea. I like the 30 yr because you have much more flexibility in case things change.

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If you're going to tear down and rebuild in 10 years it's a good option for you.

ARM loans today are not like the ARM loans that contributed to the crisis of 2007, 2008. Most now are indexed in such a way as to be much more reflective of the market.

Nearly all the higher end clients I work with prefer ARMs for the savings over time. How often does a person own the same home or have the same mortgage for 10 or more years?

In the past 6 months or so I've closed quite a few 1st time buyers on ARMs because they feel their family may grow, income may increase, a move might be made and their 1st home probably isn't a 10 or more year home.

Thank you all very much. I appreciate the feedback. I think to minimize the market crash, I intend in paying down more principle before yr 11 when the rate adjusts, so the balance is reduced during refinance / tear down / rebuild.

I love ARMs and agree with the above poster that they're great for halfway intelligent/business minded folks.

I currently have a 5/1 ARM and it's been great. Saved me a lot of money for a property I knew was short term from the get go. Now about to sell and no regrets at all.

Anyone following Kyle Bass' latest?


What would a mini-RE meltdown do to rates immediately after a downturn in RE? Hard for me to guess since we would enter the next negative event post-QE

In 7 years thingz could restablize but I'd assume a higher level than today

And not bashing ARMs b/c you can lock in your rate limit but when bad news is out there how will it affect your rate cap?

Rate cap is 8.13 % (5% higher); however, principle will be much lower at yr 11

The adjustments will reamortize the original principal.

What does that mean is dummy's terms?

It means your payment goes up because your principal reduction stays on track to pay off in 30 years. That is why they blow up on people that are unprepared. So the increased interest means roughly the same principal + the new larger interest.

ARMs don't necessarily increase in rate and blow up on people.

I locked in 3.375 on a 30 primary refi yesterday with RBFCU.

2 primary differences:
1. Yours is a refi and mine is a purchase. All else being equal they should be the same.
2. The arm I'm looking at is a jumbo arm. I want to reserve cash for other options, which is making my rate slightly closer to yours from an arm perspective.

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The adjustments will reamortize the original principal.

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My understanding in yr 11 is the rate would increase to worse case scenario to be 8.13% (max exposure). Recalculating the payment based on present value of outstanding balance, future value of 0, interest of 8.13%, and term of 20 years. Is that not accurate jja or deats? Please correct my thinking.

The loan will adjust based on the index, up or down, not to the cap. Upon adjustment the new index based rate will be used to calculate the payment on the original balance for 30 years.

.50 difference is not worth it

I'm going to ask for an amortization schedule using worst case scenario. If the original balance is used to calculate the adjusted payment, that is deceptive in my mind.

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.50 difference is not worth it

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With a jumbo over 10 years it could save $35,000 or more in interest depending on the loan amount. Plus you would have paid off a little more principal. If your plan is to refinance and rebuild at about 10 years, I would definitely take the ARM.

I agree beerag. That is exactly what I'm thinking.

You are absolutely right, they do not always blow up. But in a scenario where the rate moved up 5 points and the inquirer sounded like maybe they assumed you just paid less principal I was clarifying. ARMs are great if you know what you are getting into and have an exit strategy.

If I remember right, they're required to provide this info with your loan docs now if getting an ARM. I remember seeing it in the stack I signed.

I have checked the amortization table and the truth in lending statement. An adjustment to the interest rate in year 10 (for year 11) will do the following:

Modify the payment to be based on the following (PV of the current loan balance, FV of 0, New Interest rate / 12, Term of 20 years or 240 payments).

JJA, the only thing I can think is we must be talking about 2 different products where one uses the "Original Balance", but this uses the "Current Ending Balance" of Principle to recalculate.

Thanks to everyone for the help!

So say you borrow $750,000 on a 10/1 ARM with 5-2-5 caps (up to 5% in the first year of adjustment, up to 2% after that, lifetime cap adjustment of 5%)

Now we are assuming worst case scenario.

After 10 years(120 payments) 3.13% of normal payments of P&I of $3214.86 P=$1258.61 and I=$1956.25 payment 1, you would owe $572.927

If you adjusted up to 8.13% you 121st payment would be $4838.65 P&I Principal $957.07 Interest $3,881.58.

Now each year after that you can go up or down but up to 2 points as long as we stay below that 8.13 cap. Typically these deals can adjust downward with the original margin over the index rate being the floor. So if you were prime plus 1 or LIBOR plus 1 then the lowest you could ever adjust to is 1. There are some programs that do have an artificial floor, but in most cases it is your margin. That is laid out in your note.

Oh and to confirm your thoughts. You reamortize based on current rate, remaining term, and remaining principal.

Unless things have changed recently (and in the mortgage world they do!) ARMs typically have a max adjustment per period and over lifetime. A 2/5 used to be the norm. It can adjust up a maximum of 2% over original rate each period of change (depending on the liab every 3,5,7,or 10 yrs normally) and over the life of the loan never go collectively 5% over original rate. This keeps payments from going up too quickly (sticker shock). And the new interest rate is calculated on original amount borrowed. That is my understanding. With historically low rates I'm going to differ with others and say your better off w peace of mind of fixed rate. A lot can happen in 10 yrs with economy and your life

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If you're going to tear down and rebuild in 10 years it's a good option for you.

ARM loans today are not like the ARM loans that contributed to the crisis of 2007, 2008. Most now are indexed in such a way as to be much more reflective of the market.

Nearly all the higher end clients I work with prefer ARMs for the savings over time. How often does a person own the same home or have the same mortgage for 10 or more years?

In the past 6 months or so I've closed quite a few 1st time buyers on ARMs because they feel their family may grow, income may increase, a move might be made and their 1st home probably isn't a 10 or more year home.

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This. We went with a 10/1 ARM on our first home for almost these exact reasons.

Haven't seen this stated (and probably goes without saying), but the initial period (5/7/10) is generally IO, so make sure you are diligent in paying the additional principal monthly, or there will definitely be sticker shock when the IO period expires.

I don't believe that's the case.

Alan,


Generally ARM's are NOT interest only. If you are doing a conventional loan it will not be interest only for sure as Fannie/Freddie do buy interest only products of any sort.

There are still interest only products available (which do have their place for a small % of high net worth borrowers) but the vast majority of ARM's today are amortized loans.

I guess I'm conditioned to seeing ARMs that originated several years ago. I've never come across an ARM that doesn't have a 5-10 year IO period.

They haven't been common for several years.

Got ya. Thanks for schooling me guys.