Most people do something with their home (refinance, sell and move away or move up) every 5-7 years. That would make a 5 or 7 year fixed the loan for you if for instance you are buying a condo or townhouse and believe you will be moving up in the future to a single family residence.
Taking an ARM loan will allow you to have reduced payments due to the lower interest rate and will also then allow you to pay less interest overall during the 5-7 years you have the loan.
The downside here is that if you don't move up or move away, then the fixed rate becomes adjustable. That adjustable rate may be less than the fixed rate at that time, but could be higher than what you are paying in the beginning. The loan also adjusts to be able to pay the loan off (fully amortize) in the balance of the years left - something that could increase payments as well.
In this situation, the 5 & 7 year ARM's are good choices, but not necessarily the 10 year. The 10 year ARM often is so close to the 30 that I recommend if you are leaning towards a longer ARM to just go with the 30 year fixed.
Speaking of the 30 year fixed - If you are unsure about your time in the home, if you have found a good home for your family, good schools, etc., then the 30 year is your pick. I know that I am now in my 16th year in my home and I would not be without a fixed rate loan. Having a payment that fluctuates makes it a little difficult to project a budget down the road.
The other reason to pick the 30 year fixed is that we are still in a time where rates are historically some of the best rates in the history of home loans. Rates are destined to go up and having a low 30 year fixed rate now could possibly beat the best adjustable rates down the road should we move into a stronger economy.
These are the typical reasons for choosing - or not choosing, an ARM or a Fixed rate loan. If you have further questions, please don't hesitate to write or call. I am glad to help you and your family.
Best regards, John
I have a friend who opted for 30 year loan with the first 10 years interest only. Now that the loan will adjust, he is looking a very substantial increase in monthly payments because the remaining balance (remember the first 10 years were interest only) will have to be amortized over only 20 years at the new rate. It does not matter if the rate is lower or higher the monthly payments will be much higher because they will now include the principal that he was not paying for the first 10 years.
I would pick the 30 year fixed rate loan unless you strongly suspect that you will be moving in 5-7 years.
I totally agree with John; if you find yourself in an established neighbor that demonstrates steady demand I would go with the 30-year (which I did - been in my house 26 years now).
Simple question for you; how long do you expect to own the home? If you plan to own it for a very long time, do the 30 year and forget about the others. If you say "I get itchy feet and move every 5, 7, or 10 years" then consider the ARM's. Realize that with most ARM products the rate is capped to a 2 point maximum bump every period, but the initial bump may be 5 points. A great rate now in the 2's, may jump to the 7's when that first adjustment comes in. Are you okay with that?
best for you.
Interest rates differ for different programs too, I'd be happy to guide you with all your
options and see what is best for you.
510 882 6729
If you are not planning to stay there more than 10 years, and if the rate makes sense, 10 year ARM might be the way to go.
We have an hybrid 7 year ARM and 10 year ARM program with conversion option
The conversion option, built-in, offers you the flexibility to convert your ARM program to a fixed-rate program anytime from the first interest rate change (in 7 or 10 years) date through the fifth change date (in 12 or 15 years). It is free of charge, and the conversion interest rate would be based on the Fannie Mae's required net yield for 30-year fixed rate first mortgages, covered by applicable 60-day mandatory commitments, plus one percentage point (1.0%)....at the time of the conversion.
Feel free to call me if you have any questions.
Senior Loan Consultant
All California Mortgage
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