I have the ability to lock in a jumbo loan 10/1 ARM at 3.5% or 30 year fixed at 4.25%. Both loans have the same other costs. We will be in the new house for at least the next 25 years or so.

Over the first 10 years, the difference in interest between the two loans is north of $30k so the 10/1 ARM is attractive but with rates the way they are I wonder if I am better off locking into a 30 year rate today. The plan is to have the loan paid off between 15 to 20 years by making annual principal prepayments. The fixed 15 year loan does not work for me since it is amortized on 15 years making the monthly payment too large.

I welcome any suggestions or thoughts.

Thanks in advance.

Both of these have their advantages...and they are both great rates for today's market. I personally would go with the 4.25%, but I just prefer a fixed over adjustable rates for myself personally. Each situation is different, but that is my 2 cents. I am a mortgage lender as well and I can tell you the 30 year fixed is a great rate right now. I would not wait too long, because we have been seeing rates on the rise almost daily. We did have a couple days this week where things settled, but that flipped yesterday. It is just hard to say, but you really should look to lock as soon as you can.

I am happy to be a resource if you run into any questions.

bbailey at gomycity.com

Brian

I'd go with the 4.25% fixed. You can always refi/modify the rate down if they drop and if rates rise you'll have a below market rate locked in for the full term. And even if you don't stay in the house for the full term you'll have a fixed debt service payment if you decide to rent out the house instead of sell it.

disagree. i'd take the ARM. so many people do not stay in their houses longer than 7-8 years these days. i would take less in interest now and look to refi later often ARMs can be refied into the same fixed rate.

interesting numbers on length of homeownership.

They are a bit all over the place, but I would agree that many folks either move or refinance before the 10 year mark so it's not a clear cut decision for everyone.

https://www.financialsamurai.com/the-median-homeownership-duration-is-too-short-to-build-real-wealth/.

Our plan is to be there at least another 25 years, and hopefully forever. The only reasons I would move is if I get to the point I cant maintain the farm anymore and the kids have moved away and I cant keep up with all of the maintenance, somebody offers an absurd price, or a depression event. If we were the typical 7-8 year owners then I would go with the 10/1 ARM, but with our ownership period it makes for a curious financial decision. 30 year rates are high right now when compared with last 24 months or so but when compared with the last 30 years the rates are still very much on the low side of historical norms.

Just depends on your viewpoint. we're at the highest rates we've seen in a decade less than a year after we had some of the lowest rates in history, so it's a weird time.

I'd still lean 10/1 ARM.

Good point, it is all a matter of perspective and what time frame to evaluate. I know this isn't for jumbo rates but it is still the historical rates for a fixed 30 year rate which can be helpful to evaluate. 4.25% isn't great rate for last couple years or even the last decade but looking in context of the last 30+ years then it is still a good rate to lock in. It really is a function of how much belief do we have that the rates will come back down over the next 10 years to lock in lower than the 4.25% being offered today.

I was in your same shoes 5-6 months ago and we ended up doing the 10 year Arm.....My rational was we would either sell before the 10 years is up or I can figure things out by then.

That 3.50% ARM is going to be as high as the fixed-rate option by Fall. 4.25% fixed is such an easy choice.

When you calculated that $30k interest difference, did that include your planned extra pay down of principal?

Is there a 20 year fixed option?

I think I'd lean toward the arm of you really expect to have it paid off in 15-20... Although my real answer is do the 30 year fixed and put those extra payments into something that produced more compounding growth than the 4.25% declining interest cost.

I went back and ran the amortization schedules under both scenarios. The difference in monthly payment between the 3.50% 10/1 ARM and 4.25% 30 Fixed is $300 a month. The difference in total interest paid over the 10 year period after including additional annual principal prepayments is a tad over $41,000.

I assume the cost of refinance would be around $5k if I go with the 10/1 ARM. If I wait to refi until the very end of the 10 year period into a 15 year fixed or another 10/1 ARM, then the math shows I can go as high as 6% on the refi plus $5K cost of refinance to equal the same total interest charge that I would pay under the fixed 30 year note. Obviously, if rates are lower than 6% at time of refinance, then I am better off and if rates are higher than 6% then I am worse off.

The $41,000 savings is very attractive (although real savings is only $36k since I would have to refinance at some point). Should I roll the dice and lock in the $41,000 savings and just hope that rates are lower in the future or go ahead and lock in the 4.25 fixed 30 knowing it is costing more but having that peace of mind and if rates ever drop lower again then refinance at that time.

Thanks everyone for your thoughts and suggestions. This is very helpful to talk it out.

Huh?

I think it was a 10 year arm - not a 6 month.

I'd go ARM. Although reading the thread, it sort of sounds like you have your mind set on the fixed already.