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@Don Adams Wheel of Justice wrote:
So as we plan for buying a home in the next year or so, I’ve been looking at mortgage types, and am curious:
What are the downsides to starting with a 5/1 ARM or 7/1 ARM then refinancing in 5 or 7 years? If cash flow for the next 3-6 years will be a problem, but then will jump pretty significantly, wouldn’t 5/1 or 7/1 be appropriate for purchasers like us?
Fixed rates are at historic lows so there really aren’t any advantages to ARM loans right now. Our company closed over 80 loans last month and zero were ARM loans. PM me if you want more info.
Couldn’t agree more with this. With rates at these levels there is zero reason to do an ARM. The little savings you might get in rate is far outweighed but the risk you are taking if in fact you do have to refi. You have no idea what the rates will be in 5 to 7 years or what your financial situation might be.
There aren’t “zero reasons”–just because your situation (or many other peoples’ situations) are different doesn’t make other situations applicable… One’s specific financial situation may be a very good reason. The deciding factor is ultimately whether or not the rate on an ARM is significantly lower than a fixed rate… My financial situation 3-6 years from now will be SIGNIFICANTLY better, and so rates at that time won’t really be all that important to me. The biggest issue I am trying to work around is that our cash flow will be much, much more limited for the next 3-6 years, but after that it won’t be an issue.
That being said, my understanding is that ARM rates aren’t really all that lower than fixed rates, making the entire discussion moot anyway.
You are correct. Everyone’s situation is different. I should not have said zero reasons. My point was that (for me) the savings of doing an ARM would need to be quite significant given the potential downside of a large rise in rates and being in a tough spot in 5-7 years. With fixed mortgages being at all time lows the savings of doing an ARM vs. a fixed (again, for me) would not be worth the risk given today’s interest rate environment.
I would just be very clear on what the terms of the ARM would be (how much the rate can rise, the basis for the rate, etc.). If you are fully informed and doing the ARM makes the most sense then go for it. They exist for a reason and I believe there are stats that show people tend to move every 5-7 years.