5/1 ARM or a 30 year fixed..........

14 Replies

I am trying to weigh my options on if I should go with a 5/1 ARM or a 30 year fixed mortgage. I was leaning towards the 5/1 , because

1. I could get a cheaper interest rate initially

2. I don't plan on living in the house for longer than 5 years ( 1-2 years tops ) is my goal anyways. I plan to Rent it out after I have lived there for 1 year

Thanks BP community, as always, I really appreciate every ones insight and help

I'm currently looking at this for a new construction primary residence, but I do plan to live there over 5 years I'm hearing that currently the adjustments after the 5 years is actually lower or about the same, to the point people are keeping the loans in place. Also there are now caps on how high the rates can go at the time of adjustment.

@Mo Price , thanks for the link.

This is a complicated question that depends greatly on your situation. It doesn't matter how long you will live there, but how long you will own it. I use ARMs now but mostly out of necessity. If I was starting out with my first loans I would use 30 year fixed rate and then move to ARMs as I got more properties.

I plan on owning it for more than 5 years, just don't plan on living there more than a year ( if all goes according to plan ).

So if my purpose for purchasing this property was to live there a year and then sell it, go with the 5/1 ARM ?

If I plan on keeping the property as a Rental for 5 years plus, go with the 30 year fixed ?

Thanks much

My .02 would be to take the 30 year and lock in the rate rather than have that unknown risk floating out there. If you are only planning to keep the unit for less than five years then maybe going with the ARM is the way to go. How long you will personally live in the unit makes no difference in my eyes. How much are you truly saving each month on the payment by going with an ARM vs the 30?

If you're looking at a sale in < 5 years, you should also consider whether there are any different closing costs between the two loans. If you're paying more up front for the ARM, it might not make sense even if you plan on selling in 6 months.

@Thomas Johnson - "currently" what adjustment rates are looking like are completely irrelevant if I understand what you're saying correctly. What that means is that whoever told you that is not projecting interest rates to increase much or at all over the next 5 years - in a perfect world, that might be the case. But if rates 5 or 10 percent higher in 5 years, then you're screwed and have no recourse with the guy that projected they would not go up that much.

I am using more and more 5 year balloons, but that is out of necessity with getting into more commercial properties. On a single family, especially owner occupied, I'd go with a 30 year fixed at least 99 times out of 100.

@Michael Seeker I wasn't projecting what the rates will be in the next 5-10 years I was simply stating what has been happening right now in regards to the adjustment period with the 5 year arm and also the fact there are caps in place now, so your rate can't just sky rocket because of the market. Another point that I didn't mention before is that you can qualify for a larger loan amount with an arm vs fixed, these are all points I have recently discussed with my loan officer in comparing the best options for me.

I'd go with the fixed, especially now that they're still so low, but that's me.

Be sure to find out what the cap is and run some numbers based on that figure. If you don't mind how that effects your cash flow once you're renting the place then you'll be fine with the ARM. If those numbers make you balk, then go with the fixed.

If you find yourself saying "oh, it could never REALLY get to 10%" then you are younger than me, lol.

We are around the bottom of the interest rate curve and have been for awhile. This would not be the time for an ARM. Its simply not worth the risk in my book. I have used ARMs very effectively when taken out at the top of the curve...

Originally posted by @Thomas Johnson :
@Michael Siekerka I wasn't projecting what the rates will be in the next 5-10 years I was simply stating what has been happening right now in regards to the adjustment period with the 5 year arm and also the fact there are caps in place now, so your rate can't just sky rocket because of the market. Another point that I didn't mention before is that you can qualify for a larger loan amount with an arm vs fixed, these are all points I have recently discussed with my loan officer in comparing the best options for me.

Most conventional loans follow the Fannie Mae guidelines which are shown in a grid here. You may be able to qualify for a higher loan amount but you also have to put down more money for an ARM than a FRM, so unless you have an extra 10% to put into the deal then you will not be better off going with an ARM. If you have the additional money to put down, there shouldn't be a very significant difference between what you can borrow in an ARM vs FRM. It may be enough to get a deal done, but you and the bank are both taking on a lot more risk than with a FRM.

I'd be very skeptical about what your loan officer tells you. In my experience, you can talk to 5 different loan officers who all work for different banks using the Fannie guidelines and all 5 are will tell you different information about what they can and cannot do. I've had multiple loan officers tell me they could loan only to come back after all of my information has gone to underwriting to say "sorry, my underwriter said we cannot do this loan because of X". X being a roadblock that I clearly pointed out to the loan officer up front and they expressed would not be an issue.

Not to generalize for all loan officers, but I would not give a whole lot of credit to something a loan officer tells you unless you have a proven track record with them or they are in a position to actually make lending decisions (not likely unless it's a small bank that does not sell their loans).

@Michael Seeker

There are a lot of different programs out there and even more will be introduced as market conditions improve. Some will be risky some will be very straight forward, but I'll be honest a difference in down payment for arm vs fixed conventional is a new one to me I know some banks are offering 5% down or 10% just never heard of different down payment for one or the other, but I will look into it just incase theirs something new I need to learn, also I don't rely on just one opinion or opinions of others I have to dig into the research myself as much as possible.

Now Conventional vs FHA is definitely a difference in down payment but I am trying to avoid MIP on FHA altogether #highwayrobbery. I will probably end up going with the fixed but doing a 2nd mortgage instead of just 1 loan saves a few hundred a month.

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