30 year-fixed vs ARM

I am certainly of the opinion that you only need to get a mortgage for lower of the max number of year you plan to stay in the property or max number of years you plan to have more than 50% of the principal outstanding. If you think, that you are going to pre-pay an additional 7-10% of your mortgage amount comfortably every year, why get a 30 year and pay higher rate to the bank for the money you do not need for 30 years. Also, depends on your view of rates. My view is that if there is inflation and the rates risk, our earnings will grow and it will be easier to pre-pay the mortgage. If the inflation stays low, we can always re-finance at a lot rate. Extra liquidity and ability to pre-pay is the key. We did 5/1 ARM recently.

good advice by 300..

But, if you think rates will go up, you will want to lock in a 30yr. If rates go up drastically, that could effect property values.. ie go down.. and may be tough refinance.. your payments will go up either may.. a 5/1..

with a 30yr.. obviously, your payments will not change

300 is spot on. I am locking into a 10 yr arm this week because I think that we will not be in the apt for more than 10 years. Additionally, I will pre-pay some principal each year so that if we do decide to stay longer than 10 years, when the rate adjusts I can refinance the then lower principal and keep my monthly payment.....hopefully.....near what I am paying now as interest rates are surely going to rise. I would stay away from the 5 year arm as I think that is too short a period. As an aside, this is the same advice that I would have given 5 or 10 years ago, and people who took out a 5 or 10 yr arm at that time are now seeing their monthly payments decreasing but I that is a fluke and I can't see that happening again with arms that are taken out now. Good luck.

"What is the advantage of going30 years? It seems to me most people do not hold an individual loans for 30 years so why pay the higher interest?"

As a hedge against rising interest rates, of course.

Frankly, with rates right now at historic lows, they're only going to go up from here.

Why NOT lock in at an historically low rate?

NYCmatt, If you planning not to pre-pay and expect to live in your apartment for more than 15 years, 30 year fixed makes sense given the low rates. Ideally, a combination of two loans - 50% 30 year fixed and 50% 5-10 year floating works well for most people who plan to pre-pay but this type of product is not easily available without taking home equity mortgage with higher rate.

NYCMatt>>> Why NOT lock in at an historically low rate?

The question though is why lock in for 30 years (as opposed to any other duration). How many people buying in NYC actually run this 30 year term? Dooe it not end up your paying excess interest for terms you end up not using?

Constantly ask myself the same question - our 7/1 ARM rate is now the same as a 30-fixed. Definitely need to refi, question is what?

1) Lower the mortgage amount (15-year fixed), and take out a LIBOR + 1.8 (forget the exact #) LOC backed by portfolio.
2) 1/1 ARM, pay down aggressively, keep an eye on rates
3) 30-yr fixed, record low rates. I was quoted 4.125 a few weeks ago, now it's a touch higher.

If you're sure you'll be in the home less than ten years, don't go 30.
Ten year ARMS are not that popular, usually it's 5 or 7, but basically one is taking the 5/25 or 7/23 because one doesn't expect to be in the home long term, otherwise it's a bet about what rates will look like around refinance time. Rats are at historic lows. If you don't think you'll move, why would you speculate this way?

"Rats are at historic lows."

Who are you referring to? I, for one, am in a grand mood.

guess you folks are too young to remember that in the 80s to early 90s, the rates are 10% or higher!

at 3.75% for 30 yrs, some of us who purchased 4-5 yrs ago were paying that rate for 5/7 arms!

rate will only go up from here, lock in so you don't need to worry about it 5 or 7 years later where you know interest rate will def. be higher. ps, most of us that purchased almost ends up staying the place longer than expected. if you plan on staying for 5 yrs, get a 7 yr arm... etc

good luck

"My view is that if there is inflation and the rates risk, our earnings will grow and it will be easier to pre-pay the mortgage."

since when does a rise in inflation = raise in earnings? :-)

take another scenario: in 5 yrs, inflation is a risk, rate goes up. your housing value will most def. drop. you are looking to sell, you can't sell it at what you paid and you need to refi and rates are higher. your monthly just went up.

This is exactly the scenario that the feds are preventing now by saying "rates will stay low for 2 yrs"...