​ARM or Fixed Rate Loan - First Time Homebuyers

5 Replies

We have two options to structure our first home loan - Loan will be for $158,400 (purchase price is 176k with 10% down) - conventional.

1) 30 yr fixed rate (90% LTV) at ~3.85%. This would require a PMI payment until we get to 80% LTV.

2) Either a 5/1 ARM @ 3.0% or 7/1 ARM @ 3.25% (both 90% LTV). With these ARM's, the min the rate can go is 3.0% and the max is 9.0% with a max adj per year of 2.0%. No PMI since it is a secondary market loan.

We could refi after the 5 or 7 year fixed rate portion of the loan expires (and get a fixed rate) - question is: are there any other drawbacks with an ARM loan that we should take into consideration when making a decision? Other than the chance that when we go to refi the interest rates could have gone up and we would have to pay the costs/fees associated with the refi?

Thanks all.

@Griffin Detrick , I think the real question is, What's your timeline? If you think you'll be out of this house in 5-7 years, then an ARM is a good choice.

Have you looked at the different ARM options? Many are fixed for the 5 or 7-year term, then adjust.

Rates will most certainly be higher at that point (they can't really go lower). So, whether you move or refinance at that point, you are going to be paying a higher rate. 

If you think this is where you'll spend the rest of your life, then lock in the 30-yr fixed.

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The Mortgage Professor has a lot of good calculators to toy with for your exact scenario and assumptions.  Tax rates and other variables come into play for an exact answer.  Here is a good place to start:

Choosing Between Fixed & Adjustable Rate Mortgages

If you look through his site you'll find the calculators and other good commentary as well.  

Thanks Bryan. Given the above circumstances, would piggybacking a 2nd loan (HELOC) be an option? In an effort to avoid PMI?

Option 1: Fixed Loan and pay PMI. 30 yr (90% LTV) at ~3.85%. $176K purchase price. We have 10% to put down so will need to borrow $158,400. Our lender has informed us that the PMI costs per month would be ~$77.14, which works out to around .585% of the loan amount annually.

Option 2: Piggy-Back. 1st loan would be 30 yr (80% LTV) at ~3.85. Same deposit as above. The options for the second HELOC loan to cover the remaining 10% would be a 5 yr (2.25%), 7 yr (2.75%), or 10 yr (3.25%).

I have tried to work these with calculators online, with conflicting results. Thoughts

I like doing 80/10/10 because it puts the borrower in control and typically the minimum payment is less to boot.

I have heard about and read about way too many people that clearly and unambiguously had 20% equity, that had problems getting the call center loan servicer people to drop PMI. It's like... OK Mr Call Center Dude that we had to sit through eight different menus to get to and then wait for 45 minutes on hold, he put $20k down and just cut you an extra $20k check, and it's a $200k home, what type of arithmetic exactly is leading you to think that 40 divided by 200 is not 20%? Come on, Mr Call Center Dude, you can do it, take out a calculator and we will push the buttons together.

With the HELOC 2nd, you pay it off on your schedule, when you want, without having to ask anyone permission, and there you go your nice pretty 80% 30 year fixed with a rate and terms you were happy with is left for you to do whatever you want with.