We are planning a significant addition to our home....and I have a few options for financing.
Current home value $300k Mortgage $205k (2.5% PenFed 5/5 ARM, 1st reset in Aug 2020)
Addition/reno budget $150k After reno value $450-500k
I'm looking to finance the entire $150k if possible (not required, but preferred)
I have the option of doing the full renovation loan of $150k as a 2nd mortgage at about 4.5-5%, very low fees this way. I'd then likely refi the entire thing after we're done. I could then do another 5/5 from PenFed, or possibly do a 7/1 or 10/1 ARM
Other option is rolling everything to 1 loan, likely some higher fees invloved this way. But possibly still better than doing a 2nd and then a refi once all said and done. I'd be looking at either a 7/1 or 10/1 ARM this way as well.
The issue here is that the rates I'm getting quoted via the reno loan are higher than market rates, IMO. I can get a 10/1 for 3.125% right now, and a 7/1 for 3.0% from lenders I've used in past. But the reno loan is coming in mid 3s for a 7/1. Not so good.
But real question, what are the pros/cons of a 5/5 vs say a 10/1? They are basically close to the same initial rate (1/8th point higher for 10/1).
(Not interested in fixed rates, IMO that is just a form of insurance that I don't need).
If 10/1 is only 1/8 pt. higher, all other costs are the same, and you intend to stay in the house for more than 5 years, then 10/1 would be the best. It would be very likely that interest rates would move up over then next 5 years. An extra 1/8% is cheap insurance.
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