I have a rate locked in for either a 30-year fixed at 3.375% or a 5-year ARM at 2.75% for a refinancing. I'm trying to decide which option to go. I'm recently married and I would hope that within the next 5 years I've upgraded to a larger place, especially since the layout precludes walling off a crib room (e.g., it's not a junior 4). I'm in a 1 bedroom co-op that allows renting for only 2 years... [more]
I have a rate locked in for either a 30-year fixed at 3.375% or a 5-year ARM at 2.75% for a refinancing. I'm trying to decide which option to go.
I'm recently married and I would hope that within the next 5 years I've upgraded to a larger place, especially since the layout precludes walling off a crib room (e.g., it's not a junior 4). I'm in a 1 bedroom co-op that allows renting for only 2 years which eliminates the possibility of holding the apartment forever. Given that, I was leaning toward doing an interest-only 5-year ARM given the exceptional rate and investing the difference in the market. With NY transaction costs, I feel like I'd get a better return on the money by not using it to pay principal. Obviously there's always the risk that in 5 years for some reason I'd have to stay, and in that case I'd have to refinance again presumably at a higher rate, but I'd think that by then I'd be starting a family or at the least be looking for more space just to stretch out more.
Any thoughts are appreciated.
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It sounds like you have given the selection process the appropriate consideration. Exactly in line
with the type of counsel and questions a mortgage professional should provide/ask of you. Your reasons for selecting the ARM Product are sound and well-considered. Couldn't have said it better myself.
Good Luck!
Trevor Curran
NMLS #40140
Mobile: 516-582-9181
Office: 516-829-2900
Fax: 516-829-2944
PowerHouse Solutions, Inc.
185 Great Neck Rd, Suite 240
Great Neck NY 11021
Licensed Mortgage Banker %u2013 NYS Dept. of Financial Services
NMLS#3528
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Response by Consigliere
over 13 years ago
Posts: 390
Member since: Jul 2011
What is the savings? Estimated payments of each? I assume it is 30 year fixed with P&I.
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Response by crescent22
over 13 years ago
Posts: 953
Member since: Apr 2008
Your 30-yr fixed rate looks better than market. The 5-yr ARM rate does not. The spread between the two has compressed to 5/8. It was as wide as about 1.25% late last year.
At 5/8 per year, you lose about 3 points over the first five years, which could then get wiped out at the first adjustment. You can refinance but that will cost you fees.
I would say take the fixed rate- the price of the option to keep the rate low in 2017 is worth it.
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Response by rlr689
over 13 years ago
Posts: 158
Member since: Apr 2012
crescent22,
Well put. Some of my same thoughts but with the math clearly laid out. Also, with the 30 you are still socking away a little bit of principal in your mortgage payments, albeit a small amount, depending on the size of the loan. The main thing is that you do have certainty with fixed payments for the long term (should your plans change at all) for very little difference. However, it would be helpful to have responses to Consigliere's questions.
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Response by angray
over 13 years ago
Posts: 103
Member since: Sep 2011
Where are you getting 3.375? I want in on that.
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Response by technorat
over 13 years ago
Posts: 63
Member since: Aug 2009
The 30-year is fully amortizing and would have a monthly payment of $1,759.54. Assuming I take advantage of the interest-only option on the 5-year ARM, monthly savings would be on the order of $1,000 a month although that drops to around net $800 a month when you factor in the tax deductions, etc.
I have progressed really far along with my bank and am actually set to close on the 30-year soon but they said I could switch products and it would only delay things by a couple weeks for required disclosures, etc. I'm checking with them to see if the rates today on the products are better than what I locked in to -- unfortunately given the late stage of things there are quite a bit of sunk costs (appraisal, etc.) that would make switching banks to shop rates not worth the cost or the delay in estarting the whole process.
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Response by crescent22
over 13 years ago
Posts: 953
Member since: Apr 2008
I missed the part about the non-amortizing 5-yr loan. This is an investment decision, not a simple upside/downside of interest payments decision.
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Response by MortgageMan787
over 13 years ago
Posts: 96
Member since: May 2008
Why not look at a 7/1 IO or a 10/1 IO and leave yourself some breathing room in case everything doesnt go according to plan?
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Response by Consigliere
over 13 years ago
Posts: 390
Member since: Jul 2011
60 payments (5 years x 12 months) x $800 (savings in payments) = $48,000 in savings over 5 years
What investment are you going to invest $800.00 a month in for 5 years? Do you need the cash per month for personal things.
I personally like the safety of the 30 year fixed at the incredibly low rate. Who knows what will happen five years from now? The RE market could be terrible and you may not be so quick to sell. 5 years could be 8 years and the last 3 years could be at an unknown rate.
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Response by technorat
over 13 years ago
Posts: 63
Member since: Aug 2009
Ideally I'd invest the money in something earning higher than the mortgage rate and earn the spread -- not sure what yet. But one additional perk is my wife is planning on business school and freeing up the principal payments would certainly help with that. I've run some calculations and any benefit I get from this plan would we wiped out if I were stay till year 6 -- at that point it's basically break even. I feel like I should probably be able to be out of the place 6 years from now, but I am checking with the bank to see what they currently offer on 7-year products. My original 7-year quote was at 3.25% which wasn't worth it with only 135 bps difference to the 30-year.
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Response by Consigliere
over 13 years ago
Posts: 390
Member since: Jul 2011
Technorat,
It seems that you would do better with the 5 year arm. Next spring/summer I am looking to purchase a place and be there for around 5-7 years. At that point I will be considering a 7 I/O v 30 year fixed.
My main concern is what happens if the market drops out and I need to be in my place longer than 5-7 years. After the product adjusts to the market rate (or the spread above the index depending on the note), I could be paying double the 30 year fixed rate now, I could be paying less too. If 7 years becomes 10 years, I like the safety and that is just me.
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Response by crescent22
over 13 years ago
Posts: 953
Member since: Apr 2008
> I've run some calculations and any benefit I get from this plan would we wiped out if I were stay till year 6
This requires highly uncertain assumptions on what yield you get from your investments and what the rate resets to after year 5.
This discussion about $800 in monthly or $48,000 five-year savings is a false one because in one case you have no mortgage paydown and the other you have paid off $43,500 of the balance after five years.
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read this thread
http://streeteasy.com/nyc/talk/discussion/32321-stick-it-out-longterm-or-walk
Good morning technorat,
It sounds like you have given the selection process the appropriate consideration. Exactly in line
with the type of counsel and questions a mortgage professional should provide/ask of you. Your reasons for selecting the ARM Product are sound and well-considered. Couldn't have said it better myself.
Good Luck!
Trevor Curran
NMLS #40140
Mobile: 516-582-9181
Office: 516-829-2900
Fax: 516-829-2944
PowerHouse Solutions, Inc.
185 Great Neck Rd, Suite 240
Great Neck NY 11021
Licensed Mortgage Banker %u2013 NYS Dept. of Financial Services
NMLS#3528
What is the savings? Estimated payments of each? I assume it is 30 year fixed with P&I.
Your 30-yr fixed rate looks better than market. The 5-yr ARM rate does not. The spread between the two has compressed to 5/8. It was as wide as about 1.25% late last year.
At 5/8 per year, you lose about 3 points over the first five years, which could then get wiped out at the first adjustment. You can refinance but that will cost you fees.
I would say take the fixed rate- the price of the option to keep the rate low in 2017 is worth it.
crescent22,
Well put. Some of my same thoughts but with the math clearly laid out. Also, with the 30 you are still socking away a little bit of principal in your mortgage payments, albeit a small amount, depending on the size of the loan. The main thing is that you do have certainty with fixed payments for the long term (should your plans change at all) for very little difference. However, it would be helpful to have responses to Consigliere's questions.
Where are you getting 3.375? I want in on that.
The 30-year is fully amortizing and would have a monthly payment of $1,759.54. Assuming I take advantage of the interest-only option on the 5-year ARM, monthly savings would be on the order of $1,000 a month although that drops to around net $800 a month when you factor in the tax deductions, etc.
I have progressed really far along with my bank and am actually set to close on the 30-year soon but they said I could switch products and it would only delay things by a couple weeks for required disclosures, etc. I'm checking with them to see if the rates today on the products are better than what I locked in to -- unfortunately given the late stage of things there are quite a bit of sunk costs (appraisal, etc.) that would make switching banks to shop rates not worth the cost or the delay in estarting the whole process.
I missed the part about the non-amortizing 5-yr loan. This is an investment decision, not a simple upside/downside of interest payments decision.
Why not look at a 7/1 IO or a 10/1 IO and leave yourself some breathing room in case everything doesnt go according to plan?
60 payments (5 years x 12 months) x $800 (savings in payments) = $48,000 in savings over 5 years
What investment are you going to invest $800.00 a month in for 5 years? Do you need the cash per month for personal things.
I personally like the safety of the 30 year fixed at the incredibly low rate. Who knows what will happen five years from now? The RE market could be terrible and you may not be so quick to sell. 5 years could be 8 years and the last 3 years could be at an unknown rate.
Ideally I'd invest the money in something earning higher than the mortgage rate and earn the spread -- not sure what yet. But one additional perk is my wife is planning on business school and freeing up the principal payments would certainly help with that. I've run some calculations and any benefit I get from this plan would we wiped out if I were stay till year 6 -- at that point it's basically break even. I feel like I should probably be able to be out of the place 6 years from now, but I am checking with the bank to see what they currently offer on 7-year products. My original 7-year quote was at 3.25% which wasn't worth it with only 135 bps difference to the 30-year.
Technorat,
It seems that you would do better with the 5 year arm. Next spring/summer I am looking to purchase a place and be there for around 5-7 years. At that point I will be considering a 7 I/O v 30 year fixed.
My main concern is what happens if the market drops out and I need to be in my place longer than 5-7 years. After the product adjusts to the market rate (or the spread above the index depending on the note), I could be paying double the 30 year fixed rate now, I could be paying less too. If 7 years becomes 10 years, I like the safety and that is just me.
> I've run some calculations and any benefit I get from this plan would we wiped out if I were stay till year 6
This requires highly uncertain assumptions on what yield you get from your investments and what the rate resets to after year 5.
This discussion about $800 in monthly or $48,000 five-year savings is a false one because in one case you have no mortgage paydown and the other you have paid off $43,500 of the balance after five years.