Please poke holes in my thinking. From what I see, the 5 year arm is about 80bps below the 30 year. Rates I'm guessing continue to climb into next year where they'll peak and hover around 5 before the fed loosens things up. At which point with either the ARM or 30, you can refinance. You'd only get hurt if we never see rates below 5% again.

I'm looking at about $600K loan and 80bps is about 400/month in savings. In 5 years that's about $24K in savings and refinancing would be about $10K so you have potential save about $14K vs the 30 fixed. You'd only be screwed if rates never come down.

What rate are you seeing on a 5/1?

Was thinking something similar. I highly doubt 5%+ rates are here to stay, but it's pretty risky.

https://www.nerdwallet.com/mortgages/mortgage-rates/5-1-arm

Table midway down says 30 year at about 6.1 and 5 year arm about 5.3

Where are seeing 80 bips? Per your link it's 5.75 for the ARM and 5.875 for 30 year. Note that was on conventional loan of 300k. I could not adjust to jumbo pricing

My base case is still that the fed will have to pivot sooner rather than later, likely early next year imo. Rates are already higher than the trend line of the last pivots to easy money going back to the dotcom bust. Each pivot has come sooner and with larger stimulus packages since then. Even if we discount the impacts of raising rates into our recession, the pressure that is being put on foreign currencies due to a rising dollar are not tenable for the world markets that need dollars.

The fed may want to be the second coming of Volker but they can't or rates would already be at least that of CPI. This is all so very fascinating.

There isn't a one size fits all answer when it comes to the right mortgage for anyone.

We have both fixed and ARM options but the vast majority of our clients for whatever reason take the ARM option. I think most understand they may not be in a house for more than 10 years. If they're climbing the ladder they'll be moving up at some point. If they're going to be empty nesters they'll be downsizing at some point. Many have a trailing house they'll be selling at some point and paying off the loan inside 10 years. A lot of people in the bonus world apply that bonus and are paid off inside 10 years.

A $500K loan @ 6% has a payment of $2997/month. 4.625% has a payment of $2496/month. That's $60,000 over 10 years. In 10 years at 6% you'll owe $419K and will have paid $278K interest. At 4.625% you'll owe $402K in 10 years and will have paid $210K in interest.

Say you paid the higher payment of $2997/month (based on 6% fixed) but are paying $4.625%. In 10 years you'll owe $337K and will have paid $197K in interest.

In the event you're still in the house in 10 years and you chose to refinance to a fixed rate at 10% your payment would be the same as if you were still in the original 6% fixed rate option. For the last 50 years rates have been 10% or higher for one period of 10 years and not been that high since April 1989.

No right or wrong answer. The question I would be asking myself is what would I do with an extra $500/month over ten years. Do I see myself in that same house for 10 years in what is an increasingly mobile society.

There was a 10 year period of rising rates from early 70s to early 80s. No way to know how long this period lasts. Personally, I probably wouldn't risk it in this environment unless I'm dead set on a less than 5 year holding period.

Sent you an email

I think something else to consider is the rate on ARMs have a maximum lifetime increase amount, at least that's my understanding. So, in a worse case scenario, you might go from 4.5% to 9.5% but you aren't going to go from 4.5% to 20%.

Not sure what the math is on how long it would take to offset your interest savings for the first 10 years but it would push your "break even" point on interest expense beyond 10 years.

And obviously you don't need 30 year rates to be lower because you can also shop 20 and 15 year loan rates once you're 10 years into your repayment if you haven't found an opportunity in 10 years to refi to lower or equal 30 year fixed rate note.

Of course if the monthly payment from the max interest rate increase would cause a lot of stress and you absolutely need to stay in that house for more than 10+ years, it may not be worth the savings over the first 10 years.

Certainly agree that a 3-5 year ARM introduces a lot of uncertainty in today's environment.

One key distinction regarding fixed rates now, with regard to potentially rising rates in the future for an ARM: people are financing a much higher principle amount … the last time America had rising interest rates houses were 1/3 to 1/4 the prices they are now

i'd look at a 7 year ARM since that is around the average time most people stay in a single house these days. don't try and guess what the broader market is going to do.

I don't have any data but I would think the average duration of a mortgage is 7 or 8 years before the house is sold, paid off or refinanced. At least that's my experience. A vast majority of our clientele uses ARMs rather than fixed rate - more than 80% - even though we have fixed options. Most take the 10 year fixed option.

I had a 7 year arm on my first house (2004). Only required 10% down. Rate was in the 4s somewhere. I always intended to refi, but wound up selling and moving out of state about a year before the arm was up.

As others have said, the rate had a cap on it. IIRC, mine was pretty low, so even if rates had gone up, I wouldn't have taken a big hit. I want to say mine could even be adjusted down after the 7 year term expired.

I'd suggest digging into the details. These products aren't always as bad as their reputation.

jja79 said:

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My contact information is on my profile if you want to look at a 5/1 ARM @ 4.375%, 7/1 @ 4.5% or a 10/1 @ 4.625%. All with 0 points. I assume you're talking about a primary residence.

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What rates are you seeing for a secondary residence?

0.125% higher than primary so right now 4.75% with 0 points. 0.50% higher for an investment property so 5.125% with 0 points. That's on 10/1 ARM.

jja79 said:

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0.125% higher than primary so right now 4.75% with 0 points. 0.50% higher for an investment property so 5.125% with 0 points. That's on 10/1 ARM.

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That's still pretty damn good in this market!

How much money down for those rates?

Primary residence
80% LTV on loans >$750K
90% LTV (80/10/10) on loans with a first lien $750K or less

Second homes
75% LTV

Investment properties
75% LTV

Rate market is an absolute disaster this morning with the 10 Year Treasury getting killed today so who knows where rates are headed.