Financing in 95054>Question Details

Buyer123456, Home Buyer in 95054

Planning to take a confirming loan for buying home and confused between 5/1 ARM and 30 yr fixed loan. Interest rate difference is 1.5 which is better

Asked by Buyer123456, 95054 Wed Sep 21, 2011

Planning to take confirming loan of 417k with LTV less than 75%.Difference of interest rates between 5/1 ARM and 30 yr fixed loan is 1.625%.
a) Which would be better
b) What are the chances of interest rate of 5/1 ARM to go up and cost more than 30yr fixed
c) lender is wiling to offer 1k back for every .125% interest up for 5/1 ARM.Is it good to cover all the closing cost by raising the interest rate, plz provide ur suggestion.
d) Can you plz provide pros and cons of both the loans and which one is better in long term

0 votes Share Flag Financing in 95054

Help the community by answering this question:


a) I have mixed opinions. I am a very conservative lender and believe that you can't go wrong with a 30 year fixed -- especially considering today's great rates. If you're credit and ratios are solid, you will easily lock something in the low 4 percent range.

This being said, the mortgage is one of your greatest tax ride offs.

Basically, home equity has a 0% rate of return. The value of a home is dictated by the market, not by your payment—making extra payments on a house does not increase the value of that house. Having a large down-payment on a house does not reduce the cost of a house (there’s still a “Lost Opportunity Cost” on the down-payment—that is, whatever is stuck there in the house, is by definition *not* earning interest somewhere else. Over 30 years, that’s a lot of money. And over the life of a 30-year amortized loan (or a 15 yr, or 10, etc.) that is likewise a lot money lost, unearned.

Now even for the person who pays off their house, that same person will also have paid too much in taxes (they eliminated their only major tax deduction!). Further, paying higher taxes along the way means by definition they *didn’t* save as much other money elsewhere—they couldn’t, because they had to pay the government. And if they *did* save, it was very likely in their company 401k—for the tax deduction, of course.

b) The 5/1 ARM is a fixed mortgage for 5 years that will subsequently adjust every year after that. I can almost guarantee within the next decade, we can expect rates to increase. I believe today's rates may be artificially low but that is a completely different story.

c) Paying closing cost via the YSP can be more exppensive in the long term but if you don't have a chocie, it may not be such a bad idea. Depending on your loan amount, a greater interest rate may not be such a big difference in payment. If you are purchasing with a high loan amount, I beleive it may not be such a good idea, but if it is a low loan amount, it may be worth considering.

d) In my opinion, the fixed rate loan is much safer than the ARM loan in todays market....IF you plan on staying in the property for a long period of time. If you plan on staying in the property for less than 5 years, the ARM loan may be a good alternative...but just consider the fact that if housing conditions slump, it may be difficult to refinance out of that loan or to even sell the house.

I hope this helps!! Feel free to call me anytime or email me with any questions. I'd love to help.

Andrew Quezada
Web Reference:
4 votes Thank Flag Link Wed Sep 21, 2011
I agree with andrew!
Only thing to add is if you know for sure you will live there less than 5 years, go 5/1 A maximum conventional loan over 30 years makes more sense on a monthly cash flow basis. Your lender can run these scenarios best for you, they have all your numbers
1 vote Thank Flag Link Wed Sep 21, 2011

There is a break even point on worst case scenario for the 5 year arm that is longer than 5 years. There are sevral non-numerical factors to take into consideration along with the mathematics of the situation. Your cash-flow expectations now, 5 years from now, and further out, your propensity to handle risk both emotionally and financially, etc. I would never advise on this type of issue without thoroughly analyzing all these factors.

Please make sure that you deal woth a lender representative that will lay out your options specifically with all these considerations factored in. If your lender is not willing to do this, find another one. It is too large of a transaction with long term consequences to risk an uneducated decision.


Robert L. Hanson
Gladewater National Bank
First Time Homebuyer Specialist

Direct: 240-752-7549
Cell: 301-651-7822
NMLS# 695929

Rate quote or live chat with me at the link below:
0 votes Thank Flag Link Wed Jan 8, 2014
Smart money is on the buyer who takes the ridiculously 30 year rate and run! Can't remember in all my life or 22 years in this career the rates this low. To me it's a no brainer.

Best of Luck with your decision!
Web Reference:
0 votes Thank Flag Link Wed Sep 21, 2011
You sound very intelligent and knowledgeable,
It sounds like you are taking everything on your shoulders and you don't belive or trust your Loan Officer, Either that, or you haven't gotten a GFE from the Lenders. Possible?

The GFE's allow you to compare the details and see exactly where each money goes.
I wouldn't venture a guess without looking at them. There are so many fees where your money could disappear; some up front, some at Closing, and some over many years.

Good luck and may God bless
0 votes Thank Flag Link Wed Sep 21, 2011
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