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Fixed rate vs ARM mortgage



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amother
Denim


 

Post Thu, Mar 22 2018, 3:29 pm
How did you pick between them? We just entered into contract on a house (BH!) and are trying to figure out which loan product to go with.
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leah233




 
 
    
 

Post Thu, Mar 22 2018, 3:34 pm
Interest rates are the way up now so I wouldn't go with an ARM.

Also it it's easier to budget for the future with a fixed rate.
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doctorima




 
 
    
 

Post Thu, Mar 22 2018, 5:51 pm
In general fixed rate is the way to go unless you're planning to sell before the interest rate resets (typically in about 5 years).
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finprof




 
 
    
 

Post Thu, Mar 22 2018, 5:54 pm
If you can't afford the house at the fixed rate then you really can't afford it. Please don't be fooled by an ARM. The Fed has been clear that rates will rise and when they do your payments will rise as well. There are extremely few situations where the average homeowner should select an ARM. Those situations usually hinge on quick turnarounds (flips) or large increases in future income projections (resident to attending with accompanying salary shift) but even in these cases, there are often better alternatives to an ARM.

In all seriousness, the fact that you are asking this question to random strangers on the internet is concerning. You should not be purchasing a house without having a basic understanding of mortgage fundamentals. Aside from your retirements and your children's college education, this is the single most important financial decision you will make in your life! Please take it seriously and do legit research!
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amother
Denim


 

Post Thu, Mar 22 2018, 6:26 pm
finprof wrote:
If you can't afford the house at the fixed rate then you really can't afford it. Please don't be fooled by an ARM. The Fed has been clear that rates will rise and when they do your payments will rise as well. There are extremely few situations where the average homeowner should select an ARM. Those situations usually hinge on quick turnarounds (flips) or large increases in future income projections (resident to attending with accompanying salary shift) but even in these cases, there are often better alternatives to an ARM.

In all seriousness, the fact that you are asking this question to random strangers on the internet is concerning. You should not be purchasing a house without having a basic understanding of mortgage fundamentals. Aside from your retirements and your children's college education, this is the single most important financial decision you will make in your life! Please take it seriously and do legit research!


Oh goodness, calm down. Of course I'm doing "legit" research and have a good grasp on the basics of how the numbers work. And don't worry, we can more than comfortably afford this at a fixed rate. I was actually asking because several people I know in real life have said that a 7/1 or 10/1 ARM is the better deal, but I haven't figured out how that would be true (unless, like you said, you expect a big jump in income for some reason). As part of good research, I think it's interesting to ask a broader audience to see if there's an angle I hadn't thought of.
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FranticFrummie




 
 
    
 

Post Thu, Mar 22 2018, 6:30 pm
I used to "flip" houses. Fixed rate is the only way to go. The market is just too volatile, and world events could change overnight.

A fixed will give you real financial security, and you can always refinance if your credit scores go way up and the interest rates drop.
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SixOfWands




 
 
    
 

Post Thu, Mar 22 2018, 7:59 pm
amother wrote:
Oh goodness, calm down. Of course I'm doing "legit" research and have a good grasp on the basics of how the numbers work. And don't worry, we can more than comfortably afford this at a fixed rate. I was actually asking because several people I know in real life have said that a 7/1 or 10/1 ARM is the better deal, but I haven't figured out how that would be true (unless, like you said, you expect a big jump in income for some reason). As part of good research, I think it's interesting to ask a broader audience to see if there's an angle I hadn't thought of.


They assume you'll sell before the rate changes.
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amother
Denim


 

Post Tue, Apr 17 2018, 11:09 am
Update--We closed on our house! We did go with the 30-year fixed.
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amother
Aqua


 

Post Tue, Apr 17 2018, 11:12 am
amother wrote:
Update--We closed on our house! We did go with the 30-year fixed.


Mazel tov!
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watergirl




 
 
    
 

Post Tue, Apr 17 2018, 11:13 am
Mazel tov!
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amother
Denim


 

Post Tue, Apr 17 2018, 11:27 am
Thank you! We are so incredibly excited and thankful to be moving out of our tiny apartment and into a home of our own.
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Amarante




 
 
    
 

Post Tue, Apr 17 2018, 11:49 am
It is really hard to predict the future.

I got an ARM when I bought and it worked out fine because the interest rate was always lower than what a fixed mortgage would have been. The rate couldn't increase in any year more than a relatively low percentage and it was also capped. But all of that was pretty irrelevant because the rate was always lower than fixed.

At this point, I could pay it off if need be because the principal is very low but the interest is low enough still so that I might as well just keep the money invested which gets me a better return plus I have the tax deduction on the interest.
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amother
Denim


 

Post Tue, Apr 17 2018, 3:05 pm
Amarante wrote:
It is really hard to predict the future.

I got an ARM when I bought and it worked out fine because the interest rate was always lower than what a fixed mortgage would have been. The rate couldn't increase in any year more than a relatively low percentage and it was also capped. But all of that was pretty irrelevant because the rate was always lower than fixed.

At this point, I could pay it off if need be because the principal is very low but the interest is low enough still so that I might as well just keep the money invested which gets me a better return plus I have the tax deduction on the interest.


Yup--the fact that you can't predict the future is what makes all of this so nerve-wracking. It also depends I think on the spread of a fixed rate vs ARM. We ended up quoting both and were not getting a large rate difference so we opted for security.

Also, congrats on being to the point where you can pay off your mortgage!
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Amarante




 
 
    
 

Post Tue, Apr 17 2018, 3:18 pm
Yes. I was lucky that interest rates were low and stable.

I have lived in the same place a long time and I never took a second out or moved to something more expensive so my housing costs remained the same relative to inflation. Also in California, your property taxes are based on purchase price essentially so that is a HUGE benefit to me as neighbors who bought at current market value pay three times as much in property taxes.

I also had a variable income so some months I was able to pay only interest and when my income was higher, I Paid more than the minimum but in the end through luck, the ARM worked out. When I took it out, the spread was more significant and so the lower monthly payments were a more important factor in my decision.
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