usctrojancpa
Well-known member
It's all about time value of money....think about it this way....you can lock in a rate at 4% for 30 years today but you can get a 5-year ARM at 2.50% or a 7-year ARM around 3%. Your payment will be hundreds of dollars lower for 5 or 7 years, along with the principal of the loan being paid down faster. If LIBOR does adjust to 2.50% then your rate would go to 4.75% in year 6 or year 8 (the margin for ARM loans is generally 2.25%). You add up all the amount that you have saved plus the additional principal paydown then subtract the slightly higher payment in year 6 or year 8. Remember that the interest rate adjusts EVERY year so LIBOR can go up or down (it can only adjust up/down 5% in the first adjustment and up/down 2% in the subsequent adjustments). Like I said, ARM loans are not for everyone (especially for people that don't understand how they work OR are stretching their financials by using one to qualify for a loan).lovingit said:I'm thinking if Libor rises to 2%, with a 2.5% margin, we are right around the 4-4.5%. 30 year fixed is 4% currently. I anticipate it increasing in the next few years. I guess I don't completely understand ARMs to know why anyone would go this route, if you plan to stay in a house 10-15 years. Yes, you can refi but the rates will also increase by then. You can pay down the loan to offset the higher rate, if you have the ability to. I guess I haven't strayed away from the 30 year fixed to gamble on variable rates yet, but people seem to like them and I am trying to understand why. If margins are lower, then it makes sense.