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Long time lurker here, great insight so far advanced thanks for all your help thus far and on this particular advise... I have the option of one of the 2 offers below:

1) 30 year 3.625% fixed, or
2) 5/5 ARM at 2.825% - resets every 5 years to market - can never go above 7.825% in its lifetime (5% more than initial rate)

no points, closing costs, or costs rolled into principal for both...

I plan to hold my house probably 5-10 years but I don't mind selling before then if I get a nice cut (it has appreciated in recent years)...thanks again for any insight.

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they pay 1st month now? darn! i also got in early, and my rate is .2% higher than what's listed on their website now..... (more)

hollbot (Mar. 13, 2013 @ 4:27p) |

stm69 (Mar. 13, 2013 @ 6:40p) |

what, my application mentioned a $10k closing credit did they change that too? thanks

hollbot (Mar. 13, 2013 @ 6:43p) |

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There's plenty of others with far more knowledge on this than I'll ever have though here are my thoughts:

The amount of the loan is important info that you left out. If the loan is $100k or $500k then that 0.8% difference is going to make a substantial difference.

The rate is not really important; the APR is. 3.625% can easily turn into 5% after a mountain of 'hidden' fees.

3.625% is historically extremely low and we'll probably seldom see these kinds of rates again. Capping at a low rate will give you peace of mind and no-one can guarantee what the future will bring in the housing market or your personal life.

Thanks for your insight loan amount is $366,066.... there are no hidden fees (the appraisal, title, and even tax stamps, etc are all being credited on GFE) so APR on GFE is simialar to interest rate.. I made sure nothing is rolled into principal, thanks again.

Pagannagap said:   3.625% is historically extremely low and we'll probably seldom see these kinds of rates again.

This is what people were saying when rates were 5, then 4.5, then 4, and now 3.5%.

There is no guarantee rates won't be lower. Making the decision on this is timing, and maybe irrelevant.

If you need your loan for exactly 5 years, it is a bad decision to consider the "historically low rates" and lock in essentially a 0.75% excess interest for 5 years.

Pagannagap said:   Capping at a low rate will give you peace of mind and no-one can guarantee what the future will bring in the housing market or your personal life.

That is an entirely different story. If peace of mind is what matters, then sure.

If you truly are going to be in the house for only 5-10 years go for the 5/5 ARM. Using simple math, you pay 0.75% less per year for 5 years = 3.75%. (assuming the 5/5 loan has 2% adj caps.) In the worst case scenario your loan adjusts up 2% to 4.825%. This is 1.25% higher than the 30 year mortgage so you burn through your 3.75% savings in 3 years. So worst case you pay 1.25% more in years 9 and 10.

Should you sell or refi prior to year 9 you are guaranteed to be better off taking the 5/5.

simple n to the point, thanks.. 9 years sounds like a lot but time flies by! i'll recalc and look at what I want to do with this property more seriously, thanks for your angle happyguy.. 0.75% seems miniscule to have peace of mind with a never adjusting 30 yr but i will rethink

I don't see anything in the original post the says 2% cap on adjustments, it says market up to 7.85%

chibimike said:   I don't see anything in the original post the says 2% cap on adjustments, it says market up to 7.85%

hi mike, he is correct the 5/5 ARM has a 2% annual cap and lifetime cap of 5%...i didn't mention 2% annual cap since this is my FIRST ARM product i've ever considered due to the nice rate and 5/5 feature (as opposed to 5/1) if indeed I do happen to sell within years 5-10, so I assumed annual 2% cap was standard on ARM?, though this one also has a 5% lifetime cap.... thanks again

chibimike said:   I don't see anything in the original post the says 2% cap on adjustments, it says market up to 7.85%

5% increase is the max. Sounds like PenFed loan

FWIW, I will stay in my house I would say 3-5 years max and went with 5/5 ARM.

I spent about a week running a simulation comparing the exact question posed. (Monte Carlo randomization). I ran about 10,000 different scenarios of the future variations of the arm versus the fixed rate. In about 75% of the runs the fixed rated was better over the entire 30 years. This was even if I plowed the difference between arm and fixed back into loan. In the short run arm is always better, but in long run it becomes risky and is usually worse.

Of course arm could go down, but there is not much more room...

Fwiw I have two properties, one with an arm and one fixed. Getting very lucky that the arm dipped, I've been able to afford to keep both.

It really comes down to whether you are comfortable with the high likelihood you loan will go up in the future.

Of course, the main fact to consider when deciding between the two is how long you think you'll own the house. 10+ I'd do 30-year, <10 I'd do 5/5 ARM.

I've been running this same scenario myself, especially with the penfed incentives for the 5/5 and figured out that you'll get the biggest bang for your buck if you plan on pushing at least the first 5 (if not throughout the first 10, assuming rising interest rates at .5 per period) years to pay off as much of the principle as possible.

Essentially, if you're saving 20% from your current mortgage by going with a 5/5 and you end up rolling that savings in as principle, you'll be significantly farther ahead at the end of 10 years than you would be doing the same with a 30y fixed. The biggest difference is when you start out in a low rate ARM, your payment is essentially 50/50 P and I, while a 30y your closer to 30/70 P & I respectively. However, in an ARM situation, that 50/50 is maintained throughout as it recalculates every 5 years and adjusts your payment while in a 30y, your payment remains the same while your principle portion goes up.

Really it depends on how long you truly plan on staying there mixed with how much you plan on putting into the mortgage (lower monthly + principle or a higher monthly no extra).

BTW if you want an excellent excel spreadsheet that will give you the breakdown, this is the best one i've found so far -

http://www.vertex42.com/Calculators/home-mortgage-calculator.htm...

and a separate one for ARMs

http://www.vertex42.com/ExcelTemplates/arm-calculator.html

If you stay 10 years with the 5/5 loan, the worst you can average is slightly less than 3.825% (after one reset at the max 2% increase and paying interest on slightly reduced principal after 5 years). I'd go with the 5/5 - seems like a very simple calculation to me.

Don't use short term variable rate financing for long term needs.

Extend the maturity as long as possible with a fixed rate and let inflation eat away at the value of that mortgage debt.

Drnoside said:   I spent about a week running a simulation comparing the exact question posed. (Monte Carlo randomization). I ran about 10,000 different scenarios of the future variations of the arm versus the fixed rate. In about 75% of the runs the fixed rated was better over the entire 30 years. This was even if I plowed the difference between arm and fixed back into loan. In the short run arm is always better, but in long run it becomes risky and is usually worse.

Of course arm could go down, but there is not much more room...

Fwiw I have two properties, one with an arm and one fixed. Getting very lucky that the arm dipped, I've been able to afford to keep both.

It really comes down to whether you are comfortable with the high likelihood you loan will go up in the future.


In the analysis you ran, what is the holding period for the mortgage? The average mortgage is held for significantly less than 30 years.

brettdoyle said:   Don't use short term variable rate financing for long term needs.

Extend the maturity as long as possible with a fixed rate and let inflation eat away at the value of that mortgage debt.


great angle on inflation, thanks to all on your different but very helpful views, im still torn at how long i want to stay in my home/city but am heeding advise to advantages of both products

hollbot said:   brettdoyle said:   Don't use short term variable rate financing for long term needs.

Extend the maturity as long as possible with a fixed rate and let inflation eat away at the value of that mortgage debt.


great angle on inflation, thanks to all on your different but very helpful views, im still torn at how long i want to stay in my home/city but am heeding advise to advantages of both products


What happens if you have no choice but to stay in this property long term?

I'm in almost the exact same situation as the OP, but my 5/5 application was put in the system before the newer PenFed benefits were added (1st month payment, credit card rewards, etc) but also would not be subject to the 3 year prepayment penalty.

30 year fixed. This is a once in your life opportunity to get money at a rate like that. 5/5 ARM will be 10% before you know it.

I used 30 years--I'm in a city I love, awesome houses and I'm comfortable being a landlord. I do not forsee selling, unless there is a serious financial emergency. Logically, with rates this low, they will only increase, and they could increase significantly.

wateristasty said:   30 year fixed. This is a once in your life opportunity to get money at a rate like that. 5/5 ARM will be 10% before you know it.

Clearly, you do not understand how a 5/5 Arm works.

All things being equal, your break even point is 8yrs 10mo not taking taxes or investment opportunity costs into account.

With the ARM, initially your payment will be $160 less per month while at the same time paying your principal down $80mo more.

No brainer, go with the PenFed loan.

I am in the process of doing the 5/5 ARM as well. I calculated out the worst case scenario in my situation ($260,000 loan) and the breakeven is around the 12-13 year mark depending on market factors. For me, I don't intend on being in this home more than 10 years, so it made more sense, especially with all the incentives thrown in by PenFed.

weezyrob said:   I'm in almost the exact same situation as the OP, but my 5/5 application was put in the system before the newer PenFed benefits were added (1st month payment, credit card rewards, etc) but also would not be subject to the 3 year prepayment penalty.

they pay 1st month now? darn! i also got in early, and my rate is .2% higher than what's listed on their website now.. they wouldn't budge, so i assume they wont budge on 1st month payment as well...

cowbell, yes i came to around 8.5 years breakeven as well, thanks all for great insight from both sides of the fence.

hollbot said:   weezyrob said:   
they pay 1st month now? darn! i also got in early, and my rate is .2% higher than what's listed on their website now.. they wouldn't budge, so i assume they wont budge on 1st month payment as well...


It's really a 1 month credit on closing. You still have to pay your mortgage.

what, my application mentioned a $10k closing credit did they change that too? thanks



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