7/1 arms

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jyeh74

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I dont understand how some people have a 5/1arm and are past their introductory rate are still in the 2-3%
I 've heard ridculous stories of clients who still have high 1% even after their introductory rates.  These are tied to 1 year Libor or T Bills.  I believe they had ridiculously low margins around the 1% or so. Nowadays, margins are around 2.5%.  So to stay at a intro rate of 3% after the 7 years are up on a 7/1 ARM, the index cannot go past 0.5% (with a 2.5% margin)
So if rates go back to 2012 when they were 1%, then rates will be higher than than the introductory rates.  As low as index rates are now, I don't see it staying 0.5% for long.  Any thoughts here?
 
The break-even point in an absolute worst case scenario for most 7/1 ARMs compared to a 30yr fixed mortgage is 13 years if you make the higher payment that you would have had with the 30yr fixed.

ARMs are good if you are pretty sure you'll stay in your mortgage for less than 13 years. Considering the average american only stays in their home for 7 years and you can get out of a mortgage by refinancing, ARMs are a better deal than fixed rate mortgages for the majority of homebuyers.
 
paperboyNC said:
The break-even point in an absolute worst case scenario for most 7/1 ARMs compared to a 30yr fixed mortgage is 13 years if you make the higher payment that you would have had with the 30yr fixed.

ARMs are good if you are pretty sure you'll stay in your mortgage for less than 13 years. Considering the average american only stays in their home for 7 years and you can get out of a mortgage by refinancing, ARMs are a better deal than fixed rate mortgages for the majority of homebuyers.
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+1  The break even assuming worst case scenario ranges from 10 to 13 years (the higher the spread between the 7/1 ARM and the 30 year fixed the longer the break even period) and tack on another 1-2 years if you adjust for time value of money. 
 
Interest rate has been fairly low for the past few years for the refinance strategy to work very well. But wonder what's the strategy for refinance if the interest outlook is on a (steady, or even sharp) raising trend, so at what time would you consider refinance, if ever? 3/5/7 year?
 
Anybody with a 30 year fixed is an idiot :-)

The key thing with an arm is to have the resources to deal with a rate increase up to your rate cap by being able to pay down a significant chunk of the loan or just pay it off.
 
Also, if the first rate adjustment isn't the cap rate adjustment (first rate adjustment can be 5% from start rate) then the break even point can go out several more years (the 2nd and all subsequent rate adjustments are capped at 2%). 
 
How does a 5/5 ARM work in the 11th year?
https://www.penfed.org/55-Adjustable-Rate-Mortgage/

3.25% for the first 5 years then 3.65% for the next 5 years?
But then it says there is a 2% max increase in the second 5 years and a 5% maximum lifetime cap.  So not sure how they do 3.65% in year 6-10. 

Shouldn't it be 3.25% + 2% = 5.25% max in years 6-10?

Are these generally better than the 7/1 ARMs?
 
lovingit said:
How does a 5/5 ARM work in the 11th year?
https://www.penfed.org/55-Adjustable-Rate-Mortgage/

3.25% for the first 5 years then 3.65% for the next 5 years?
But then it says there is a 2% max increase in the second 5 years and a 5% maximum lifetime cap.  So not sure how they do 3.65% in year 6-10. 

Shouldn't it be 3.25% + 2% = 5.25% max in years 6-10?

Are these generally better than the 7/1 ARMs?
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3.65% the next 5 years is only if the libor rate remains where it is now.

5/5s aren't common but they could definitely be better than a 7/1 if you get the same upfront rate and fees.
 
USCTrojanCPA said:
Also, if the first rate adjustment isn't the cap rate adjustment (first rate adjustment can be 5% from start rate) then the break even point can go out several more years (the 2nd and all subsequent rate adjustments are capped at 2%).
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Easy to say for the past ten years, during a lowering interest rate environment. That environment is near an end and we will be in an increasing rate environment shortly. A lot of things to factor but to make a blanket statement like that, it just isn't accurate. If you plan on selling in 5 years, certainly you'd be a fool going with a fixed rate mortgage, but there are a lot of things to consider. Both can be advantageous depending on the situation, circumstances, and market outlook.
 
qwerty said:
Anybody with a 30 year fixed is an idiot :-)

The key thing with an arm is to have the resources to deal with a rate increase up to your rate cap by being able to pay down a significant chunk of the loan or just pay it off.
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how about 15 year fixed?  are they also idiot?
 
Again, all depends on the circumstances. I could argue the benefits are the wide spread between the 15 and 30 year fixed. On the flipside, you lose a lot of the flexibility of a 30 year mortgage. In theory, you could have a 30 year mortgage and pay it off much sooner and follow a 15 year plan, however, in the instance you lose a job, get sick, or other unforseen situations come up, you have some additional flexibility vs. having to make the 15 year payment.

Of course, in those circumstances, you could also refinance, however, if you've lost income and other means as a result of whatever incident came up, you might have difficulty qualifying, etc, and you might also find out you end up paying significantly more in rate when you refinance. Again, it really is a matter of the spread and what the additional flexibility is worth to you (on top of questions around whether you can afford a 15 year vs. 30 year in the first place for what you want).

Probably a lot of other stuff I didn't list in her as well, such as age and demographic. Nearing retirement, not looking for a bigger home, vs. younger and still seeing growing income and want to get into a bigger place for your growing family, etc, the 30 year option again, allows you to stretch a bit (although hopefully still with a payment you are comfortable with). Better to live an extended period of time below your means then above your means (or I'd even argue, at your means). 

But I'm a conservative CPA, haha. 
 
yaliu07 said:
qwerty said:
Anybody with a 30 year fixed is an idiot :-)

The key thing with an arm is to have the resources to deal with a rate increase up to your rate cap by being able to pay down a significant chunk of the loan or just pay it off.
Click to expand...

how about 15 year fixed?  are they also idiot?
Click to expand...

i was just joking because i had a 30 year, still do. doing a refi into a 5/1 arm.
 
ARM loans require some measure of commitment to pay down the principal, a realization that you might sell in X number of years, or an increasing income to overcome any adjustment. If those caveat's give you pause, the traditional fixed rate is still the best way forward for some.

ARM's are great financial tools when wielded in the right manner. Even the accursed Option ARM was for the most part a really smart borrowing choice, but unfortunately too many people were sold the 1.0% rate/payment without the required worst case scenario outline clearly explained to homeowners prior to close.

When The Bernank says rates will not normalize in his lifetime, to me that's a clear signal to give ARM's a second look.

My .02c
 
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