Financing in 95129>Question Details

Blue888, Home Owner in San Jose, CA

5/1 ARM rate 2.75% vs 30 yr fixed 4.375% loan program

Asked by Blue888, San Jose, CA Tue May 3, 2011

5/1 ARM rate is 2.75 now (no closing fee).My current loan(amount around 520K) is 30 yr fixed 4.375% . Is it worth to switch to 5/1 ARM program ? Not sure how long will live in current house. This ARM program has max rate increase cap 2% at 6 th year. From 7 th year, rate will be index margin.

0 votes Share Flag Financing in 95129

Help the community by answering this question:

Answers

18
Blue,

While I do agree with the other posters that you have an excellent fixed rate, I think your option can be broken down a little bit to make the decision clearer based on your anticipated stay in the home. If you stay in your current loan for the next 10 years, at 4.375%, the total percentage of interest paid over that time would be 43.75% (or 10 x 4.375% = 43.75%) for an average yearly interest of 4.375% (obviiously).

Assuming this ARM option has a 2% max cap per year (which you indicated) and a lifetime cap of 5% (which you did not mention, but I would assume) if you refinance into a 5/1 ARM at 2.75% for the first 5 years, and then it increases at year 6 by the 2% cap to 4.75% and another incresae of 2% in year 7 to 6.75% and again in year 8 by 1% (as the cap of 5% would now be reached) to 7.75% and stays there for year 9 & 10 as well, your numbers would look like this:


Year 1 - 5 2.75% x 5 = 13.75
Year 6 4.75% x 1 = 4.75
Year 7 6.75% x 1 = 6.75
Year 8 - 10 7.75% x 3 = 23.25

Total interest paid over the 10 years would be 48.50%, for a yearly avergage of 4.85% .

Therefore in this case, if you were to stay the home for ten years, it would make more sense to keep your current fixed rate. However, if you stay in the home for only 8 years, the average yearly interest would be on 4.125%, making it slightly adventatgeous to refinance into the ARM.

While there are certainly other considerations when deciding to use an ARM, I hope these numbers give you a little more information in order for you to make an informed decsion.

Best,
Dave
Web Reference: http://davidsetti.com
1 vote Thank Flag Link Tue May 3, 2011
Take the Fixed and pay off what you can as extra toward the premium down the road, you are better off
0 votes Thank Flag Link Thu Jul 7, 2011
Hi everyone,

Are those advices?

Andy
0 votes Thank Flag Link Thu Jul 7, 2011
Sounds like a very good deal if you plan on staying there 5-7 years. Maybe a little too good, my guess is a 5/2/5 on the adjustments, sounds like a 5/1 LIBOR. By no closing fee do you mean no closing cost? Any of you lenders have a 5 year ARM with a start rate that low and no closing costs?
0 votes Thank Flag Link Tue May 10, 2011
I always recommend a fixed rate vs a ARM, but whatever seems to work for you.
0 votes Thank Flag Link Tue May 10, 2011
Hi Blue888,

I have a conservative view on this subject. I am a firm believer that if you can comfortably afford the fixed payment, then stick with that.
One reason is, that if you have an adjustable rate and the market tanks (causing the rates to go up), something could happen that might jeopardize your ability to refinance when you really need to (such as losing a job), and you will be stuck. Besides, by the time adjustable rates have gone up... the fixed rates have gone up as well.

The second reason, is that as time goes on, more of your payment is being applied to principal reduction and less torwads interest. Refinancing only starts the process over again.

I believe one should play it safe when it comes to the roof over their head. If you want to gamble, do it with an investment property.

Finally, I would seek the advice of another lender to clarify all caps and index info should you decide to go with an adjustable loan. You need to be crystal clear on this.

-Lawrence
0 votes Thank Flag Link Tue May 3, 2011
Blue888 - how about that first adjustment at end of year 5? Is it 2% or 5%?
0 votes Thank Flag Link Tue May 3, 2011
Just clarify I assume no closing fee charge for rate comparison purpose. There will be charge in real case.
Cap rate means incremental rate changes.

5/1 ARM program has more risks than 30 yr fixed program.

Thanks all !
0 votes Thank Flag Link Tue May 3, 2011
Just a FYI, any refinance in California changes a mortgage from non-recourse to recourse, it makes no difference what the terms are. The only mortgages protected from recourse are purchase money first mortgages on primary residences.

The OP needs to verify the rate and terms because they don't exist. There is no 2/2/2 caps and no 2.75% 5/1 that yields enough to do a no cost high balance refi.
Web Reference: http://WeFixRates.Com
0 votes Thank Flag Link Tue May 3, 2011
I could be wrong...but are there any 5/1 ARM's left with a 2% cap in the 5th year? I'm pretty sure they went to a 5% cap for that first adjustment, and then 2% per year after that first potential 5% adjustment. Kind of alters the equation a little.

I walked through this exact scenario with a client and when he got the TIL and GFE from the lender touting the "2% cap" there was in fact a 5% 1st payment adjustment. The LO pitching this loan either didn't know what he was talking about or was intentionally misleading the client - either answer is bad.

Blue888 - are you sure that's a 2% cap at the end of the 5th year?
0 votes Thank Flag Link Tue May 3, 2011
Also, check with your lender if you decide to refinance if that will change your loan from a non-recourse to a recourse loan.
Web Reference: http://www.terrivellios.com
0 votes Thank Flag Link Tue May 3, 2011
If you can afford to pay your current mortgage, why would you want to change to an adjustable? Five years goes by fast. Who knows what interest rates will be in 5 years. If you need to reduce your current monthly payment, maybe look at a 10 year ARM if you think you might sell by then or hopefully refinance to a low rate before the 10 years is up.
0 votes Thank Flag Link Tue May 3, 2011
Terri-

What if the lender paid the cost out of the spread?
0 votes Thank Flag Link Tue May 3, 2011
There are always cost associated with refinancing, you may not pay them out of pocket, they may be added into your loan, so check with your lender or ask David Setti to give you an estimate.
Web Reference: http://www.terrivellios.com
0 votes Thank Flag Link Tue May 3, 2011
You have good answers and a good analysis by David, but I would like to know who is quoting you a 2.75% 5/1 ARM on a 520K loan amount with no closing costs. There is also no ARM product with a max cap of 2%. I would suggest you double check with whomever quoted you this and make sure it's actually available.

Generally, companies that solicit borrowers in already established, low rate, 30 year fixed mortgages are not looking out for your best interests and may tend to be misleading with the numbers.
Web Reference: http://WeFixRates.Info
0 votes Thank Flag Link Tue May 3, 2011
I agree with Tim on this one. The only thing about a yearly arm is that every year it is reamortized whereas the fixed rate pays increasingly more on the principal each month for the duration of the loan . The 1 year arm pays increasingly more monthly on the principal but only for 12 payments. Then it is reamortized and begins as a new loan. You could also take advantage of this lower payment by paying the difference directly to your principal at the end of the year, which would reduce your principal even faster. You need to look at both amortization schedules to see which is right for you.
0 votes Thank Flag Link Tue May 3, 2011
Stay where you are if you think you are likely to be in there beyond year 6. You have an excellent fixed rate.
0 votes Thank Flag Link Tue May 3, 2011
I can not imagine why you would want to switch to an ARM these days with fixed rates so low. With that said, if you are quoting the cap correctly you are looking at a 5 year ARM that will stay at 2.75% for 5 years and can go no higher than 4.75% in the 5th year and then adjust based on the index margin. If you plan to be moving in 5-6 years that might be a pretty good deal. If you are thinking you might be there 10 years it might be better to go fixed.
0 votes Thank Flag Link Tue May 3, 2011
Search Advice
Ask our community a question
Email me when…

Learn more

Copyright © 2014 Trulia, Inc. All rights reserved.   |  
Have a question? Visit our Help Center to find the answer