Irvinehomeseeker
Active member
Who was the lender that you closed the deal to get 3.125 rate? Will be very helpful to know.
How low can we go? 30 yr fixed at 3.75% with no fees...
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Are you a preferred customer? Was the credit just to reimburse you the fees of the refi? (Closing Costs, Appraisal, Notary, etc), or did you actually get a no-fee loan with $1,500 cash in-hand upon closing?
Their posted rates don't look anywhere near that:https://www.bankofamerica.com/home-loans/mortgage/mortgage-rates.go
Also with the spread between 5/1 ARM rate and 30 year fixed rate currently are not that much, it makes a little harder to select 5/1 ARM over 30 year fixed.
When I bought my new home about 3 years ago, the 30 year fixed was around 4.3% and 5/1 ARM was at 2.75%. The spread was pretty significant and its no-brainer to go with 5/1 ARM at that time. And now with 30 year fixed in the low 3s and 5/1 ARM in the high 2s, I not sure if I'll still go with 5/1 ARM.
LTV? Can't even find 3.5 with 75%+ LTV.
Right. The secondary market players establishing these rates are making highly educated informed statistical probability bets. The average mortgage borrower choosing an ARM for the lower rate, rather than the 30-year fixed option, is objectively a fool to be betting against the secondary market.
However, you know your subjective situation best and whether your facts allow you to manage this risk well, making the lower rate for a few years a reasonable bet and a nice windfall. If you're not too indebted with the mortgage (front-end DTI closer to 20% than 30% and back-end DTI closer to 25% than 40%) and you have decent reserves/wealth when opting for the ARM, you will very likely have many options available should rates rise significantly.
Similarly, if you lost your job, you might have a rainy day fund to hedge you through a hard time, but if rates were rising during that time frame, you'd be unable to refinance. Again, it all comes down to how prepared you are and what sort of bind you are in.
Probably the safest, most macro scenario is, if you are getting the ARM because the difference in cost allows you to afford the house, you are probably in a more dangerous territory, vs. the scenario where you could afford the 30 year fixed, but are trying to proactively take advantage of the delta in rates, have reserves, and are in a position where in most plausible scenarios you could refinance, and in the case you couldn't, you know you could deal with various run-ups in the situation.
Edit:
"...it does bring significant savings for the initial fixed rate years.
Right, but by locking your 3.5% rate for the full 30 years, at an effective rate of ~2% considering taxes, you're guaranteeing 30 years of seeking higher uses of capital that might earn > 2%, not just a few years.
aquabliss
Well-known member
IrvineBS said:
Are you a preferred customer? Was the credit just to reimburse you the fees of the refi? (Closing Costs, Appraisal, Notary, etc), or did you actually get a no-fee loan with $1,500 cash in-hand upon closing?
Their posted rates don't look anywhere near that:https://www.bankofamerica.com/home-loans/mortgage/mortgage-rates.go
Perspective
Well-known member
I don't think mortgage rates can/will skyrocket within the next 5-10 years either, but make no mistake. The reason these ARM rates are ~50-100 bps lower than the 30-year fixed rate is because banks/investors are that thrilled to transfer the risk of rising rates to you.
I treat the additional interest paid for the first few years in a 30-year fixed mortgage as insurance. It's expensive insurance. However, on $1M or less of indebtedness, the IRS and FTB are paying nearly half of it.
I treat the additional interest paid for the first few years in a 30-year fixed mortgage as insurance. It's expensive insurance. However, on $1M or less of indebtedness, the IRS and FTB are paying nearly half of it.
Perspective said:
Also with the spread between 5/1 ARM rate and 30 year fixed rate currently are not that much, it makes a little harder to select 5/1 ARM over 30 year fixed.
When I bought my new home about 3 years ago, the 30 year fixed was around 4.3% and 5/1 ARM was at 2.75%. The spread was pretty significant and its no-brainer to go with 5/1 ARM at that time. And now with 30 year fixed in the low 3s and 5/1 ARM in the high 2s, I not sure if I'll still go with 5/1 ARM.
irvinehomeowner
Well-known member
IrvineBS said:
LTV? Can't even find 3.5 with 75%+ LTV.
Perspective
Well-known member
qwerty said:
Right. The secondary market players establishing these rates are making highly educated informed statistical probability bets. The average mortgage borrower choosing an ARM for the lower rate, rather than the 30-year fixed option, is objectively a fool to be betting against the secondary market.
However, you know your subjective situation best and whether your facts allow you to manage this risk well, making the lower rate for a few years a reasonable bet and a nice windfall. If you're not too indebted with the mortgage (front-end DTI closer to 20% than 30% and back-end DTI closer to 25% than 40%) and you have decent reserves/wealth when opting for the ARM, you will very likely have many options available should rates rise significantly.
irvinebullhousing
Well-known member
I like the stability options, especially when I have young kids. Its a gamble that I can't live with with the ARMs. I do agree with Perspective on the insurance part of the 30 years that it is expensive. That's why we chose the fixed option. When it comes down to it, I only pay 200 bucks extra a month that I can make that in an hour of work, so it would be foolish of me to gamble on the long run. Sure rate is low now and into future. But things can change and when it does change, it will be pretty quick to address whatever shortcoming.
Traditional method is boring but it had proven to works in the long run for me. People memory are short but I still remember the last downturn when people taken out exotic and options ARM and lost out on their largest investment. The effect is devastating not only to your family as well your financial. If I gamble I go to Vegas and plop down 200 on Red/Black and walk away.
Traditional method is boring but it had proven to works in the long run for me. People memory are short but I still remember the last downturn when people taken out exotic and options ARM and lost out on their largest investment. The effect is devastating not only to your family as well your financial. If I gamble I go to Vegas and plop down 200 on Red/Black and walk away.
Their are pro's and con's to both. The 30 year fixed is the safer alternative, but you can absolutely make a case for why the ARM is best. You should recognize the fact that on the risk side, if the market were to soften and rates were to rise, in the situation with an ARM, you may find yourself in a position where you can't actually refinance (because the value of the property has decreased) and as a result, your potential plan to minimize the damage from rising rates, doesn't exist. That said, you wouldn't think that would happen overnight and thus, as long as you are alert and attentive, you'd be able to manage.Compressed-Village said:
Similarly, if you lost your job, you might have a rainy day fund to hedge you through a hard time, but if rates were rising during that time frame, you'd be unable to refinance. Again, it all comes down to how prepared you are and what sort of bind you are in.
Probably the safest, most macro scenario is, if you are getting the ARM because the difference in cost allows you to afford the house, you are probably in a more dangerous territory, vs. the scenario where you could afford the 30 year fixed, but are trying to proactively take advantage of the delta in rates, have reserves, and are in a position where in most plausible scenarios you could refinance, and in the case you couldn't, you know you could deal with various run-ups in the situation.
ARM certainly has its risk and it's not for everyone but it does bring significant savings.
USCT did a very good analysis on 7/1 ARM while back, its a good read for anyone who is interested.
http://www.talkirvine.com/index.php/topic,1588.0.html
USCT did a very good analysis on 7/1 ARM while back, its a good read for anyone who is interested.
http://www.talkirvine.com/index.php/topic,1588.0.html
Perspective
Well-known member
lnc said:
Edit:
"...it does bring significant savings for the initial fixed rate years.
Perspective
Well-known member
What's odd about many ARM enthusiasts, is that their reason for supporting ARMs is due to the 50-100 bps savings. The argument is typically, "I'm not over-extended, and if the rate adjustments get crazy in a few years, I'll just pay off/down the loan." Yet, if 50-100 bps is a big issue for you, and you have the means, why not pay the mortgage off as soon as possible, regardless of its structure or rate, and save 300+ bps?
LongIrvine
Member
Some might be higher better uses of capital.
300bp pretax cost vs apx. 200bp after tax.
300bp pretax cost vs apx. 200bp after tax.
Perspective
Well-known member
LongIrvine said:
Right, but by locking your 3.5% rate for the full 30 years, at an effective rate of ~2% considering taxes, you're guaranteeing 30 years of seeking higher uses of capital that might earn > 2%, not just a few years.