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#11
11-01-2005, 06:46 PM
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Re: Interest Rates gamble - 30 yr. fixed vs. 5-year ARM\'s
rates are on an upward trend and should continue to do so. but way out know one knows. if your financial position expects to be much better in 5 years gamble on the rates and save now. but if you are stuck in a fixed income for the future lock in now.
also you may save enough to pay it way down in those five years i hope. as its always a better feeling owning your own home outright. i like shorter term financing as you save now and now is the best time to save. as long as you dont just blow that savings on consumer goods then go far out in years. good luck as owning a home is the start to becoming wealthy. 
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#12
11-01-2005, 06:58 PM
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Re: Interest Rates gamble - 30 yr. fixed vs. 5-year ARM\'s
it really depends on the index and margin and the caps (adjustment cap, life cap, floor) of the ARM. Assuming it's standard, though, I would almost always go with the 5 yr ARM in your spot. This is your first house, it won't likely be your last. You said your horizon is 5-7 years...if this is the case, then a 5 year ARM is a no brainer. You are paying soooo much more over the 5 years w/ the 30 yr fixed that it becomes much more burdensome than the small chance that
A) you are still in the house in 5 years B) rates are significantly higher in 5 years C) you are not only in this house, but still have this loan in 5 years (rate/term isn't the only reason to refi) D) you won't have a non-marginal increase in pay 5 years from now All in all, unless you are set in stone that this is going to be THE house for 10 yrs, get the ARM. If it makes you feel more comfy, get the 7/1...the yield curve is so flat right now that the 7/1 is usually only 1/8 different than the 5/1. Think about it this way: You are saving .75% each year. Not counting TVM, that's 3.5% over 5 years that you have saved over that time. In order for a 30 year fixed to have been a better decision, you would have to have a rate on your ARM after the 5 year period long enough to add up to 3.5% difference on the backside. With the caps that are likely in place on your ARM, it would likely take a while to do that. Again, this is discounting the fact that a few hundered dollars a month now is likely worth much more to you now than a few hundered dollars 5-7 years from now (both from an inflation and an income standpoint). I'll PM you my phone # if you want to discuss. (I'm in real estate finance)
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#13
11-01-2005, 07:22 PM
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Re: Interest Rates gamble - 30 yr. fixed vs. 5-year ARM\'s
It largely depend on the structure and caps on the ARM. Take a look at the MAX shift on the arm (how often? how much?). Ask your bank/mortgage broker to show you the annual payments on both mortgages assuming a substantial shift up in rates over the next year...
Interest rates are likely to be a point or so higher this time next year, over five years, who knows. Mtg rates are still near all time lows, so I don't think you can go too wrong with the fixed....
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#14
11-01-2005, 07:33 PM
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Re: Interest Rates gamble - 30 yr. fixed vs. 5-year ARM\'s
Just out of curiosity, are you buying in Seattle proper or in the burbs?
I was in about the same boat about a year and a half ago, and we went with a 5-year ARM. The breakeven point versus a 30 year fixed is actually like 7 years on our loan, and we're pretty sure we'll move by then. Congrats and don't let the housework drive you crazy.
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#15
11-01-2005, 08:10 PM
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Re: Interest Rates gamble - 30 yr. fixed vs. 5-year ARM\'s
[ QUOTE ]
Just out of curiosity, are you buying in Seattle proper or in the burbs? [/ QUOTE ] Burbs. Thanks again to all for the additional feedback.
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#16
11-01-2005, 08:23 PM
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Re: Interest Rates gamble - 30 yr. fixed vs. 5-year ARM\'s
Another consideration is how much you are putting down, and how much you expect the house to appreciate in the next 5-7 years. I bought a house 4 years ago, and put 50% down. My income can vary month to month, and I wanted to have the security of low payments, and I knew my house would appreciate over the next 5-7 years. I went with a 5 year interest only loan. you really do not pay off much of your loan in the first 5 years, and if you know the house is going to appreciate, you are still building equity in the home. The other nice thing about interest only is 100% of your payment is tax deductable, since 100% of your payment is going to interest.
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#17
11-01-2005, 08:53 PM
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Re: Interest Rates gamble - 30 yr. fixed vs. 5-year ARM\'s
Unless you can predict interest rates better then the market it shouldnt matter assuming the probability at any point in time you move is the same as the average person(i.e if you move more they variable less then fixed). That being said most hedge funds that do this sort of thing are betting that the yield curve flattens so maybe a variable would be better, but in the end the market is pretty effeceint so it really shouldnt matter.
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#19
11-01-2005, 11:39 PM
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Re: Interest Rates gamble - 30 yr. fixed vs. 5-year ARM\'s
[ QUOTE ]
There is no gamble here. Get the fixed, it will only go up from here and fast. [/ QUOTE ] Sure there is a gamble. If he moves in 5 years, he will have paid a premium for the fixed rate but gained no advantage.
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