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I am looking for some opinions regarding what type of loan I should get, a 30 year fixed or a 10 year ARM. The rates I've been getting for the fixed fall into the 3.75-3.875 range, 4.0 being the max. For the 10 year ARM, the rate I've gotten is 3%.
My situation is that I'm hoping to buy a 1br co-op, and I plan on living there about 8-12 years, 15 max. What do you think I should do?
I knew it was you Daniel!
I think you should ask your new financial advice person.
Assuming $400,000 Loan Amount:
You save $20,000 in payments over the first 10 years in the ARM (3.0) versus the Fixed (3.75). Even if it adjusts to the max of 8% (most have a five percent max adjustment) You are risking paying $25,982 extra for the last two years.
I would roll the dice and take the $20,000.
The max loss is $5,982 and the max up side is $20,000. Pretty good odds.
And you can always save your shekels every month and pay off the loan earlier, in interest rates go up that much. Indeed, if they're higher, your savings account will probably be growing that much faster. Unlike today!
Thank you for the advice!
Actually, the loan amount would be for around 258,000-250,000. What do you think of this change?
Any other thoughts?
Really depends on the rest of your financial situation and your philosophy on accumulation v. insurance.
In my view, a 30-year mortgage can be a good "insurance policy" against future loss of job/earning potential, rising interest rates, and life plans changing. I know, I know... no one thinks they need insurance.
I'll say that I've had 30-year loans on properties I owned for as little as two years, and I don't regret the extra cost for a second. The flexibility and peace of mind was worth it.
In my current co-op, I did give serious consideration to an ARM because my odds of being able to pay off the loan at the end of 10 years were decent, and I can only sublet for one year, limiting potential to hang onto it as a rental property if I wanted to move at a time when prices were depressed.
In the end, I just couldn't do it. There were still too many "what if" scenarios with decent likelihood of occurence for me to feel comfortable.
I took out a 5/1 year arm, and every year I get to pay less. Go with arm. The fed will never raise interest rates.
"I took out a 5/1 year arm, and every year I get to pay less. Go with arm. The fed will never raise interest rates."
That is the worst advice ever. Rates have nowhere to go but up, and unless you assume a decade-long economic malaise like Japan at some point the Fed's going to want to counter inflation and will raise rates to do so.
Having said that, a 10/1 ARM on a 1 BR seems totally reasonable. It's unlikely to be where you want to live forever.
Regarding 30-year as insurance... I tend to disagree. I think would guess that for most NYC 1 BR home-buyers, the bigger risk they'd want to insure against is temporary loss of income (long layoff for instance) during their holding period (let's say <10 years for most people). A lower rate achieved through an ARM (and an I/O arm even moreso) lowers the required monthly nut and allows you to last longer on your savings / diminished income.
The 30-year is insurance against the scenario where (1) you need / want to stay more longer in your apartment than you had expected and (2) rates go way up. While you can debate the likelihood / impact of #2 (and even though a rise in rates makes houses less affordable and therefore pushes down prices, I personally believe that a high rate environment is 80%+ likely to happen only if there is a strong economy which should offset the pricing), #1 is something largely under your control.
Finally, if you are disciplined to use the extra rate savings to pay down extra mortgage, you will have less debt outstanding which definitely derisks your deal (and will allow your monthly carrying costs to be lower even if you do ultimately have to refi / reset to higher rate.
Just my 2c
I had the same choice a year ago and chose 30 year for a coop purchase. I kind of regret it now for all the reasons mentioned here. If it were a condo, however, and I had the choice again I'd still go 30 year for the possibility of keeping it as an investment property. But I can't really sublet, don't see myself here for over 15 years, so while I have peace of mind I think it was a small mistake. I don't lose sleep over it though.
"A lower rate achieved through an ARM (and an I/O arm even moreso) lowers the required monthly nut and allows you to last longer on your savings / diminished income."
That is absurd reasoning.
A 10-year ARM payment, despite the marginally lower interest rate, is nearly three times the size of a 30-year fixed rate mortgage. How does that allow one to last for any period on a diminished income?
Matt, 10yr arm is a 30yr mortgage that is fixed for 10 years, not a 10yr mortgage.
Ahhh. Thanks for enlightening me.
My apologies to freebird.
you need to find out if the coop will allow you to purchase with that kind of mortgage. some have frowned on it since 2008. before going all in, get the facts. if you are a marginal applicant, that mortgage can get you a rejection.
An ARM is better protection against short-term unemployment, but I still think the 30 year is better for loss of earning potential/under-employment. E.g., lose a job and the new one pays a lot less.
With an ARM, the worst-case scenario is that your earning potential declines, interest rates spike, and the rate resets to 8-10%. You can't afford your apartment or to move to another place, and you're forced into a choice of selling at a loss or depleting/bleeding out your savings.
I am more conservative about money than most on this board (and probably also more "middle class" than most, at least for NYC), but that scenario would eat at me just a little.
In 10 years you probably will not have any equity in your coop and will not be able to refi your 10yr arm. If you by chase go have equity, rates will be higher, so best to lock in a 30yr at these low rates.
I had same choice: 10 yrs. In ten years your situation will have changed so dramatically that there is likely zero chance you will still be in your first place.
If you won't be there in 10 years, rent, don't buy, you will lose money after transaction costs.