10 yr arm vs. 30 year Mortgage

13 Replies

We are new to this and trying to see what would be our best options for our primary residence mortgage in Bay Area, CA

$900,000 mortgage

3.625% int - 10 yr arm - $7,000 closing costs
4.00% int - 30 yr fixes - $7,000 closing
Both our credit scores are above 780.

We are planning to keep this property for at least 10 to 15 years, if not more. Me and my spouse are in late thirty and mid forties and have a kid who will go to college in 10 years. 

I am leaning towards 10 yr arm and spouse towards 30 fixed, reasoning from other end is, if we refinance we end up paying more interest and longer term. I want to do the 10 yr as the interest is low and we don’t know in 10 years we may rent it or sell it for an upgrade or downgrade.

What is the norm in these situations?

Most of the general public gets 30 year fixed rates. Most agents and lenders get adjustable rates.

Russell Brazil, Real Estate Agent in Maryland (#648402), Virginia (#0225219736), District of Columbia (#SP98375353), and Massachusetts (#9​0​5​2​3​4​6)
(301) 893-4635

Huser,

If it were me, I'd go with the 10/1 ARM.

I’m not a Nostradamus, but if history is any indication, we should have a downturn within the next 10 years. The Fed will likely cut interest rates to 0%. I’m willing to bet mortgage rates will drop below 3%. In fact, this has been my thesis since 2009 and I’ve been making bets based on this thesis. However, property value may take a hit too. If you don’t have healthy equity, you may need to bring cash-in to obtain the new lower mortgage rate. 

By the way, my little sister just completed a refinance on her residence. It was also a 10/1 ARM at 3.625%. However, her closing costs were less than $4k. This was with Meriwest Credit Union.

Best of luck. 

@Minh Le Even when the Fed had interest rates at zero, and were probably the largest purchase of treasuries ever, they still couldnt force the average 30 year fixed rate below 3%.

Russell Brazil, Real Estate Agent in Maryland (#648402), Virginia (#0225219736), District of Columbia (#SP98375353), and Massachusetts (#9​0​5​2​3​4​6)
(301) 893-4635

The spread isn't enough for the adjustable rate risk IMO.  10 yrs goes quickly. We have been in our house 11 yrs already. Got a 15yr fixed in 2012 and glad for that.

Bond yields just hit a 4yr high. Either way I'd lock in soon.

Take door #1

The 30 year fixed.

Being a old man, I still remember mortgage rates way way past 10%.

Pay the premium (risk premium) for protection.

Huser,

@Russell Brazil , my thesis is that he will have an opportunity to refinance to a lower mortgage rate within the next 10 years. In fact, I’m willing to make this bet on whoever is willing to take me on it.

@Steve Vaughan , although the spread is not significant in this case, the payment on a 15-yr mortgage vs. 30-yr is significant on a $900k loan. Also, if history is any indication, he’ll have an opportunity to refinance to a lower mortgage rate within the 10-yr window. 

We’re in a balance sheet recession. Rates have no where to go but down. That’s my thesis, and I’m putting my money where my mouth is. 

Huser, at the end of the day, it’s your final decision, and you have to live with the consequences. Just remember Happy wife = Happy life. 

Definitely the 30 yr fixed if it were me. Gives you more security in knowing your rate won't increase and more flexibility down the road. For example, if you want to pay more towards the fixed rate mortgage and pay it off quicker you can, but you don't have to. With the 10 yr ARM you can't choose to pay less if rates go up.

Ultimately, I agree with @Steve Vaughan - the small savings in the interest rate between the two isn't enough to take on the risk of the ARM.

Just my two cents.  Good luck either way.

Originally posted by @Minh Le :

@Steve Vaughan, although the spread is not significant in this case, the payment on a 15-yr mortgage vs. 30-yr is significant on a $900k loan. Also, if history is any indication, he’ll have an opportunity to refinance to a lower mortgage rate within the 10-yr window. 

We’re in a balance sheet recession. Rates have no where to go but down. That’s my thesis, and I’m putting my money where my mouth is. 

Huser, at the end of the day, it’s your final decision, and you have to live with the consequences. Just remember Happy wife = Happy life. 

 Hi Minh!  Just clarifying that I wasn't necessarily recommending a 15 yr loan. That payment on a $900k balance would be enormous.  Just stating what we did when the rate of a 15 was 25% less than a 30. 15 yr rates are at least worth checking out.  It is generally about .4% lower than a 30.

I agree that rates may drop over the next 10 years, but not sure if enough to take on the cost and indigestion of a refi. $7k and hours of paper work and turning in homework like your back in high school again. If rates do drop a lot, Huser would be able to refi whether he has a fixed rate or an ARM.

I usually see the ARM being about 1% less than a fixed if a 3 or 5yr. A spread of less than .4% doesn't account enough for the risk for me. Watching bond yields and fretting for years. Good discussion!

Rates are at historic lows, thus logically speaking they can only go up. So let’s play devils advocate and you get a ten year arm and at the end of that are your rate goes up to 10% and you have no equity to refinanace. You’re In a sh** world of hurt.

Originally posted by @Marcus Johnson :

Rates are at historic lows, thus logically speaking they can only go up. So let’s play devils advocate and you get a ten year arm and at the end of that are your rate goes up to 10% and you have no equity to refinanace. You’re In a sh** world of hurt.

Sure, let's play. When was the last time rate goes up and real estate prices went down? Can you give an example? 

Huser, the delta in the interest rate is 0.375%. That's equivalent to $3,375/yr premium to lock in a 30-year fixed on a $900k loan. You can call it the cost of buying insurance. I believe in my thesis so it doesn't make sense for me to pay a premium when I know there's a high probability I will get an opportunity to refinance at a lower rate within the next decade. 

Life is a journey in and of its course. Take risks or make bets along the way. If you're right, you'll be wealthier. If you're wrong, you'll be wiser....hopefully. ;)

@Minh Le

For the most part in history, market trends seem to indicate that the housing costs trend upward as do rising interest rates except in the early 1980's as described in by the Urban institute for research on this website:  https://www.urban.org/urban-wire/when-interest-rates-go-healthy-economy-history-says-home-prices-will-rise

The problem was in the 1980's as you can see where although in 1981 housing prices went up, interest rates went up substantially more so the costs of ownership was 4X's worse then someone in 2016.   Also in 1986, housing prices went down, while rates were up 8 to 10%.    

Thanks all for the valuable inputs. We are going with 30 yr fixed.

Glad to hear you are going with 30 year fixed. One good reason to do this I want to add is that if housing appreciates at even a modest 5% average per year your appreciation will be well over the 500K capital gains exclusion currently in place for primary residence. At that point it is often not economically easy to justify selling and paying the huge capital gains tax. No matter what the Fed does, California tax is 13% at the top rate and unless the tax law is repealed will not be a write off on Fed taxes.  Bottom line, selling your primary residence after 10 years of appreciation may not make sense so having a fixed rate may be VERY attractive.

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