Fixed vs Adjustable rate, what to chooose.

[Noyessie Hubert]

Hi, I just spotted a 4-family room which makes sense for me and my credit union is offering a conventional loan mortgage for 5% down.  Here are the two options the lender offered to me:

- Option 1: 30-year conventional

interest rate: start at 9%

final rate from home appraisal

0 discount point

$0 origination fees

- Option 2: Adjustable rate 3/5 or 5/5

interest rate: start at 7%

0 discount point

$0 origination fees

I plan to take a loan for a $650k house with 5% down. I have a 770+ in credit score. I don't understand quite well the adjustable rate. Please can someone help me navigate over that?

- What questions should I ask?

- what is the tip when you consider an Adjustable rate? Can we refinance it after less than 3 years?

Thanks for your help.

[Doug Smith]

That's actually a bigger spread between fixed and variable than I've been seeing. They are daring you to take the variable rate. I do think we'll see a bit higher rates at the end of 2024...maybe 1/2% but no one has a crystal ball. Take the difference in interest per month...for a $617,500 loan, a 2% difference would be $1029.17/month. You might want to add 1/2% or so to the variable rate to account for increases...so the difference between a 1 1/2% spread would be $771.88/mo in savings going variable. Take your total closing costs (minus tax and insurance escrows) and divide it by that $771.88 number to get your break-even point in months. That's how many months it would take you to offset the cost of a refi...or at least it would be an approximation to make a decently informed decision. I think rates will go up, but I'm not sure if they will go up that much. I would need to see the reset dates and terms. It's not an exact answer, but no one can give you that with a variable rate deal. You'll have to make some assumptions and do the math accordingly.