7/1 ARM mortgage

[benchmark]

I have a 4.25% fixed rate mortgage, and now they are offering me a 7/1 ARM with 3.0%. On one hand, it's never a good idea to chase lower rate; but on the other hand, the rate is too good. So now I'm tempted to re-finance into a 7/1 ARM, knowing that i might have to pay a balloon payment in 7 years if the rate goes up dramatically. Am I too short-sighted?

[rmitz]

I have a 4.25% fixed rate mortgage, and now they are offering me a 7/1 ARM with 3.0%. On one hand, it's never a good idea to chase lower rate; but on the other hand, the rate is too good. So now I'm tempted to re-finance into a 7/1 ARM, knowing that i might have to pay a balloon payment in 7 years if the rate goes up dramatically. Am I too short-sighted?

 

If that is 30 year fixed, stick with that. 15 year makes that a trickier decision.

[rranjan]

If you can be on top of the rates fluctuations then you might be able to get 3.75% or below , 30 years fixed rate. Rate sheets of most banks gets adjusted twice a day so you need to find the information in real time to lock the rate.

 

If you get 3.75 or lower then you need to see if getting 3% only for 7 years is worth the risk. Difference in rate will be less than 0.5% after you take account of tax deductions. I will stick with cheap 30 years. In my opinion even 4.25 % is not bad so you need to make sure that you don't spend too much in refinancing to make it worthwhile.

[benchmark]

I have a 4.25% fixed rate mortgage, and now they are offering me a 7/1 ARM with 3.0%. On one hand, it's never a good idea to chase lower rate; but on the other hand, the rate is too good. So now I'm tempted to re-finance into a 7/1 ARM, knowing that i might have to pay a balloon payment in 7 years if the rate goes up dramatically. Am I too short-sighted?

 

If that is 30 year fixed, stick with that. 15 year makes that a trickier decision.

 

To clearify, my loan has a fixed 30yr at 4.25% and a HELOC at 4.25% which is float. The reason that I'm tempted to for 7/1 is that not only the rate is lower, I can combine the two loans into one and reduce the risk of the HELOC starting floating up in 2 years.

[benchmark]

If you can be on top of the rates fluctuations then you might be able to get 3.75% or below , 30 years fixed rate. Rate sheets of most banks gets adjusted twice a day so you need to find the information in real time to lock the rate.

 

If you get 3.75 or lower then you need to see if getting 3% only for 7 years is worth the risk. Difference in rate will be less than 0.5% after you take account of tax deductions. I will stick with cheap 30 years. In my opinion even 4.25 % is not bad so you need to make sure that you don't spend too much in refinancing to make it worthwhile.

 

How do you stay on top of the rate? I've never heard 30 yr fixed with that low rate (I'm in CA, so loan is bigger than 417K). I'm inclined to not do 7/1 if I didn't have the HELOC portion of the loan.

[rkbabang]

If you can be on top of the rates fluctuations then you might be able to get 3.75% or below , 30 years fixed rate. Rate sheets of most banks gets adjusted twice a day so you need to find the information in real time to lock the rate.

 

If you get 3.75 or lower then you need to see if getting 3% only for 7 years is worth the risk. Difference in rate will be less than 0.5% after you take account of tax deductions. I will stick with cheap 30 years. In my opinion even 4.25 % is not bad so you need to make sure that you don't spend too much in refinancing to make it worthwhile.

 

How do you stay on top of the rate? I've never heard 30 yr fixed with that low rate (I'm in CA, so loan is bigger than 417K). I'm inclined to not do 7/1 if I didn't have the HELOC portion of the loan.

 

Bankrate.com says that today's average 30 year mortgage rate is 3.8%.  I'd rather refinance everything to a fixed rate than do the 7/1. I just bought a house last November and I got a 25 year fixed at 3.85%.  You never know what rates will be in 7 years, nor what your situation will be in 7 years.  If you have a fixed rate mortgage and rates go down you can always refinance again to a 15year mortgage or something.  But, if you have the 7/1 and rates have shot way way up you could find yourself in trouble.

 

--Eric

 

[rranjan]

If you can be on top of the rates fluctuations then you might be able to get 3.75% or below , 30 years fixed rate. Rate sheets of most banks gets adjusted twice a day so you need to find the information in real time to lock the rate.

 

If you get 3.75 or lower then you need to see if getting 3% only for 7 years is worth the risk. Difference in rate will be less than 0.5% after you take account of tax deductions. I will stick with cheap 30 years. In my opinion even 4.25 % is not bad so you need to make sure that you don't spend too much in refinancing to make it worthwhile.

 

How do you stay on top of the rate? I've never heard 30 yr fixed with that low rate (I'm in CA, so loan is bigger than 417K). I'm inclined to not do 7/1 if I didn't have the HELOC portion of the loan.

 

You can get an idea of ongoing rates from different sites like Bankrate, zillow etc. You can also get actual quote from many lenders by using lendingtree but you will start getting calls so you you need to use it only when you are ready. You can get quote from some good brokers and then use them to keep you updated about the rates. Many ways to do it but take the quote at same time to compare.

 

Don't simply go to big banks directly. They have horrible rates. Example: I went to wells and Bank of America and they quoted me much higher rates even though Wells Fargo ended up buying my loan from the other bank. Wells could have given me same rate and kept the whole margin but they did not give me that rate. I think they go for higher volume with less margin when they buy the loans in bulk.

 

I don't know know your zip code but for your state with higher than 417K loan, best rates are below 4%. Not a real quote but a ball park. I have more than 417K in MD and my rate is 3.75%. You could have gotten bit lower but best rates were lasting for only few hours and difficult to get lock even though I was using very good broker.

 

Best of luck with your refinancing.

 

 

[benchmark]

I have a 4.25% fixed rate mortgage, and now they are offering me a 7/1 ARM with 3.0%. On one hand, it's never a good idea to chase lower rate; but on the other hand, the rate is too good. So now I'm tempted to re-finance into a 7/1 ARM, knowing that i might have to pay a balloon payment in 7 years if the rate goes up dramatically. Am I too short-sighted?

 

If that is 30 year fixed, stick with that. 15 year makes that a trickier decision.

 

To clearify, my loan has a fixed 30yr at 4.25% and a HELOC at 4.25% which is float. The reason that I'm tempted to for 7/1 is that not only the rate is lower, I can combine the two loans into one and reduce the risk of the HELOC starting floating up in 2 years.

 

Another option is to combine the loans for a 30-yr fixed at 4.375%.  My loan is in the super-jumbo category, so the rate all seems to be higher.

[rranjan]

  My loan is in the super-jumbo category, so the rate all seems to be higher.

 

With super Jumbo loan, unless you can fork out the cash to cover loan after 7 years , it's better to not take a chance. If you are planning to hold the house for only 4-5 years then it might work out well with ARM loan otherwise it's better to stick with cheap fixed rate. We can  discuss about 3.75% or 4.25% but remember historically rates are in lowest range. If and when rate goes up, 3.75% or 4.25%,  both will look pretty cheap.

[beerbaron]

Dam you american get great rates! Canada sucks when it comes to mortgage rates.

 

BeerBaron

[benchmark]

  My loan is in the super-jumbo category, so the rate all seems to be higher.

 

With super Jumbo loan, unless you can fork out the cash to cover loan after 7 years , it's better to not take a chance. If you are planning to hold the house for only 4-5 years then it might work out well with ARM loan otherwise it's better to stick with cheap fixed rate. We can  discuss about 3.75% or 4.25% but remember historically rates are in lowest range. If and when rate goes up, 3.75% or 4.25%,  both will look pretty cheap.

 

I completely agree, if the difference in rate is only 0.5? but in this case, it's 1.25%, that's what makes this tempting....

[tooskinneejs]

Alright, I'll go against the grain and give the argument for taking that lower, but variable, rate.  Using Karl's mortgage calculator at http://www.drcalculator.com/mortgage/ :

 

Assume a $400,000 mortgage with a 30 year loan at 4.25%:

Monthly payment = $1,968

Principal balance in May 2019 (7 years from now) = $345,454

 

Next, assume a $400,000 mortgage with a 7/1 ARM with an initial rate of 3.00%:

Monthly payment (first 7 years) = $1,686 ($281 less)

Principal balance in May 2019 = $335,082 ($10,372 less)

 

The difference in the principal balances 7 years from now isn't that great.  However, let's assume you pay on the 7/1 ARM using the $1,968 payment you would have had to make on the 30 year fixed.

 

$400,000 mortgage with a 7/1 ARM at 3.00%:

Monthly payment (first 7 years) = $1,968 ($1,686 required plus $281 additional each month)

Principal balance in May 2019 = $308,755 ($36,699 less)

 

Now we're talking real money.  Then the question you face is what is the risk that rates jump a lot and stay high for the remaining 23 years of the loan.  Most ARM's limit the rate change to +5%, so the max rate would be 8%.  If it jumped that high and stayed there, your payment would be $2,451/month.  Could you handle that increase 7 years from now?

 

Even with the maximum rate jump to 8%, it would take approximately 6 more years (i.e., year 13 of the loan) before your total cumulative payments would exceed those under the 4.25% 30 year fixed.  Most people don't stay in a house for 13 years.  Maybe you won't.

 

Hope this helps.  You should definitely double check my numbers (or better yet, run this scenario using your actual principal balance).

 

Good luck.

[Crip1]

Full disclosure: I'm in the mortgage industry.

 

Reagrding the refi, I completed a refi in the fall. After looking at 30 year fixed (lower monthly payment but extended my loan another 6 years), a 7/1 ARM (too much uncertainty of my financial condition in 7 years, not to mention the crap shoot that is trying to predict interest rates 7 years from now), 10/1 ARM (Similar to above, but with 3 additional years to pay down principal), I went with a 15 year fixed. The payment is higher, but with all things besides Income Taxes factored in, courtesy of my "super-size" spreadsheet, it takes 15 months to break even, then I'm ahead of the game...21 months if you want to include taxes. The rate on a 15-fixed was very close to a 10/1 ARM and within reason of a 7/1 ARM. That 15 years coincides with my turning 63 which seems like a good retirement age since my kids, God willing, will be out of college by that time. Look at a 15 or a 20 fixed, and find a good mortgage banker to work with who can pull rates from multiple investors. I would offer up the services of my company, but this board is about exchanging information, not drumming up business.

 

Quick note about "Big Bank" vs. "Small Lender" pricing. The way most Big Banks work (Chase, Wells, B of A, US Bank) is that they have a "war room" which spits out rates/pricing to their internal marketing channels. These channels then add their required profit margins and send out pricing which ends up a the desk of loan officers who then will quote rates to prospective borrowers. We are a correspondent lender, meaning that we close the loan in our name and then sell to Chase, Wells, Etc. If the Correspondent channel within a big bank is relatively busy, they will add a heftier profit margin so that they know that the volume they receive will be solidly profitable. If a particular channel is not busy, they will lower margin to bring business in the door so that the folks earning paychecks are being used. This changes daily. So, the blanket statement of "rates are bad a big banks" is not 100% true, but I know that we've beaten a locak Chase branch with a Chase product, multiple times. I also know that we've been beaten by Chase branches in the past as well. The change happens pretty often so getting a Loan Officer who is trustworthy, who will work for you and who is at least reasonably knowledgeable is your best choice.

 

Finally, the industry is completely insane right now. We had to decline a loan of a guy who had very good credit, about 10 years of payments in savings (reserves), was putting down 30%, had debt ratio of less than half of what was required and had not made a late mortgage payment in a decade. The reason is that he had only two credit lines open, a mortgage and one other. The "rules" state that one needs 3 lines open. I took this forward for an exception and was declined. My response was "So, if this guy had a couple of late mortgage payments, gave away $100,000 and had a 40% cut in pay BUT had opened a credit card account 6 months ago, we could have approved him"...the response: "Yes". I kid you not.

 

-Crip

 

[Kiltacular]

Crip,

 

Useful / interesting info.

 

Thanks

[alpha231616967560]

When I refinanced, I went with a 30 year fixed at 4.25%, but I add about 20% to the payment every month to reduce the principal. This gives the flexibility of a 30 year but the option to pay off early if it works out. I also pay 2x month instead of once / month, which in itself reduces the length of the loan by just under a year.

 

 

[benchmark]

Alright, I'll go against the grain and give the argument for taking that lower, but variable, rate.  Using Karl's mortgage calculator at http://www.drcalculator.com/mortgage/ :

 

Assume a $400,000 mortgage with a 30 year loan at 4.25%:

Monthly payment = $1,968

Principal balance in May 2019 (7 years from now) = $345,454

 

Next, assume a $400,000 mortgage with a 7/1 ARM with an initial rate of 3.00%:

Monthly payment (first 7 years) = $1,686 ($281 less)

Principal balance in May 2019 = $335,082 ($10,372 less)

 

The difference in the principal balances 7 years from now isn't that great.  However, let's assume you pay on the 7/1 ARM using the $1,968 payment you would have had to make on the 30 year fixed.

 

$400,000 mortgage with a 7/1 ARM at 3.00%:

Monthly payment (first 7 years) = $1,968 ($1,686 required plus $281 additional each month)

Principal balance in May 2019 = $308,755 ($36,699 less)

 

Now we're talking real money.  Then the question you face is what is the risk that rates jump a lot and stay high for the remaining 23 years of the loan.  Most ARM's limit the rate change to +5%, so the max rate would be 8%.  If it jumped that high and stayed there, your payment would be $2,451/month.  Could you handle that increase 7 years from now?

 

Even with the maximum rate jump to 8%, it would take approximately 6 more years (i.e., year 13 of the loan) before your total cumulative payments would exceed those under the 4.25% 30 year fixed.  Most people don't stay in a house for 13 years.  Maybe you won't.

 

Hope this helps.  You should definitely double check my numbers (or better yet, run this scenario using your actual principal balance).

 

Good luck.

 

Doing some rough calculation, if i use the extra savings with 3% rate to pay down mortgage, at the end of the 7 year, the difference in principle is about 100k, which is quite large, which makes it very attractive. On the other hand, what if the rate jumps to 10% in 7 years....

[keerthiprasad]

I'm going through this process at the moment.  Found a smaller regional bank and going with a 7/1.  I think (and really hope) my financial situation will be significantly different in 7 years anyway.  Otherwise I definitely would've taken the 30 yr considering how low the rates are.

[A_Hamilton]

I say forget the 7/1 and use PenFed's 5/5 Program

 

www.penfed.org

[tooskinneejs]

benchmark said: "On the other hand, what if the rate jumps to 10% in 7 years...."

 

What are the terms of the 7/1 ARM you are looking at?  Most have a maximum lifetime adjustment of 5%.  If that's the case, the 3% ARM could never carry a rate higher than 8%.  Also, you could refi again after the 7 years is up and switch over to a 30 year loan or maybe even a 15 year loan.  And if your principal balance is $100k less than it otherwise would be in 7 years, the payments on the refi'd loan might be pretty good even with a higher rate.

 

A_Hamilton said: "I say forget the 7/1 and use PenFed's 5/5 Program"

 

I've used PenFed in the past.  Their rates are good and the fees are very low.  But Benchmark is saying he can get 7 years at 3% rather than only 5 years at 3% currently being offered by PenFed.  As long as the fees aren't that different, it's definitely better to get those extra two years.

[A_Hamilton]

benchmark said: "On the other hand, what if the rate jumps to 10% in 7 years...."

 

What are the terms of the 7/1 ARM you are looking at?  Most have a maximum lifetime adjustment of 5%.  If that's the case, the 3% ARM could never carry a rate higher than 8%.  Also, you could refi again after the 7 years is up and switch over to a 30 year loan or maybe even a 15 year loan.  And if your principal balance is $100k less than it otherwise would be in 7 years, the payments on the refi'd loan might be pretty good even with a higher rate.

 

A_Hamilton said: "I say forget the 7/1 and use PenFed's 5/5 Program"

 

I've used PenFed in the past.  Their rates are good and the fees are very low.  But Benchmark is saying he can get 7 years at 3% rather than only 5 years at 3% currently being offered by PenFed.  As long as the fees aren't that different, it's definitely better to get those extra two years.

 

tooskinneejs, I understand he wants to lock in the 7 years at 3%, I just think the 5 year fixed at penfed, with a max 2% bump for years 6-10 is a fantastic deal versus a potential 500 basis point jump at the end of the 7 year fixed term.

 

Separately, as you say, tough to beat PenFed on fees. This could save you a point or two upfront!

[tooskinneejs]

Good point Hamilton.

[benchmark]

I'm now being offered 3.5% for 15yr fixed, the monthly payment is a lot higher, but the rate is fantastic.

[A_Hamilton]

I'm now being offered 3.5% for 15yr fixed, the monthly payment is a lot higher, but the rate is fantastic.

 

Benchmark, what state do you live in, and is your mortgage balance less than fannie/freddie maximums? I look at a LOT of banks and thrifts so may have an idea of who is competitive in your market area.

[benchmark]

I'm now being offered 3.5% for 15yr fixed, the monthly payment is a lot higher, but the rate is fantastic.

 

Benchmark, what state do you live in, and is your mortgage balance less than fannie/freddie maximums? I look at a LOT of banks and thrifts so may have an idea of who is competitive in your market area.

 

5/1 2.875%

7/1 3.125%

15 year 3.5%

30 year 4.375%

 

A_Hamilton, I live in CA, my loan amount is greater than 629K, which I think is greater than the fannie's max, and falls into super-jumbo category. The quote above is what's current today. Let me know what you can find, thanks.

[benchmark]

Now they are offering 15yr fixed at 3.375%, now this is really tempting...but Buffet said that taking a 30yr at 4% is the best hedge on dollars, so I'm still banking on 30yr going lower...