5 - 1 ARM

[sealy]

Does anyone know anything about a 5 - 1 ARM? I'd be especially interested in knowing your take on it if you have one now. I'm doing research on it but don't want to get stuck with the lil things I don't know. I didin't post this question on the other sites because I feel more comfortable with my WIR sisters and brothers. Thanks.

s

[Deleted]

I just refied into a 5/1 ARM. The rate was so low I could not help myself.

Do you have any specific questions about it?

[sealy]

The realtor said that the payments would depend on the new rate. For example if I had a $200,000 loan and had paid off $15,000 by the end
of 5 years my new payment would be based on $185,000 instead of the original balance of $200,000.

s

[Deleted]

That is correct. So if you have $185k left after 5 years, your new payment will be based on the new rate, $185k balance and amortized over 25 years. The next year the same process will happen with a new balance, new rate over 24 years.

Miscosoft has a great loan amortization template that you can fool around with to determine what your payments might be under different circumstances. Also, don't forget taxes and insurance.

office.microsoft.com/en-us/templates/loan-amortization-schedule-TC001019777.aspx

[sealy]

what does amortized mean? I am seriously contemplating it. The rate right now is 2.75. On the other hand I'm thinking I may want to pay off my
more of my debt.

[sealy]

Thanks Archie at least now I know she wasn't dishonest. I just don't want to get
in my house and find that I chose the wrong program. I will be paying extra money on my
principal also. I think this would be a good program for me.

She said it's based on the Tbill and that the most it coulc adjust was one percent in either
direction. The cap would be 5 percent. She said that would mean that the worse case
senario my rate would end up being 7.75 percent at the end of 10 years if I didn't refi.
But those rates would be based on the lower principal rather than the original sales price.

I'm just wondering what the catch is. It looks too good to be true so I must be missing something.

[Deleted]

I purchased my house in July with a 5/1 ARM. The catch is that after 5 years your rate could be higher than what you could get a 30 year rate for right now. The ARM will have an amount it can adjust yearly and a lifetime cap. It sounds like the one you are looking at can adjust only 1% each year after the 5 years and can not go up more than 5%.

and yes, the new payment is based on the principal when the mortgage adjusts and is amortized over 30 years.

[Deleted]

The catch is that you pay off very little principal over the first 5 years of a mortgage, so when it adjusts, it can make the payment go up quite drastically. I encourage you to play with the amortization schedule I linked to so you can see what you payment could be.

Also, just be sure of the terms. The ARM I am in has a lifetime cap of 5%, an annual cap of 2%, but in the very first year it adjusts, it can adjust by the full 5%.

[Deleted]

Jan 15, 2012 9:06:04 GMT -5 ArchietheDragon said:

The catch is that you pay off very little principal over the first 5 years of a mortgage, so when it adjusts, it can make the payment go up quite drastically. I encourage you to play with the amortization schedule I linked to so you can see what you payment could be.

Also, just be sure of the terms. The ARM I am in has a lifetime cap of 5%, an annual cap of 2%, but in the very first year it adjusts, it can adjust by the full 5%.

My ARM adjusts the same way although after the initial adjustment it might only be able to adjust by 1%.

[sealy]

She said that after 5 years it will adjust but it can only adjust by 1% one way or the other and the lifetime cap is 5%.
I'm wondering if it gets to the 7.75% will it adjust lower the next year since it can't go up? Does it continue to adjust
every year until it's paid off?

[sealy]

to all of you for helping me make sense of this

[sealy]

So is the 5/1 a negative amortization loan. I also want to be able to pay off my mortgage without penalties.
I don't want a loan that's going to place me upside down.

[sealy]

My attraction is the fact that the interest rate will be on the lower principal rate not the original one.
I plan on paying as much as I can to get it as low as I can as quickly as possible.

[Deleted]

Jan 15, 2012 9:58:40 GMT -5 sealy said:

So is the 5/1 a negative amortization loan. I also want to be able to pay off my mortgage without penalties.
I don't want a loan that's going to place me upside down.

no it is not a negative amortization loan as long as you are making payments that apply to both principal and interest. At the beginning of the loan you are making the same payment as you would if you had that interest rate for 30 years. At 5 years when the loan resets, the payment is what it would be for whatever the principal balance is at that time, with the new interest rate, again as if it were a 30 year loan. so years 1-5 is a 2.75% loan on $200,000. starting in year 6, if it adjusts up 1%, it would be a $180,000 loan at 3.75%. All payments are based on spreading it out over 30 years, but every time it adjusts, the payment is based on a lower principal balance.

[Deleted]

Jan 15, 2012 10:04:07 GMT -5 @toughtimes said:

It can become one if interest rates change drastically enough and you are making minimal payments. I think these are very complex products, and I just don't like them, but most people on this board know that I am something of a pessimist, and very, very loathe to take on debt.

Whether there are prepayment penalties is another issue entirely. Some of these products were notorious for crushing prepayment policies, so I would have a lawyer look it over before I signed.

May I ask what the attraction of an ARM is given the very low rates on 30 year mortgages?

the attraction is that you can qualify for a larger mortgage. It is assumed your income is going to go up (getting a degree, stop paying for daycare, regular raises) so you can get the house you want and grow into the payment.

Look at all the people whose payments adjusted down.

[Deleted]

Jan 15, 2012 10:54:56 GMT -5 @toughtimes said:

Look at all the people whose lifestyles adjusted down, and out of a house, when the resets hit.

well I guess they didn't verify that they could still make the payment at the cap of the interest. I've had multiple ARMs and have either refinanced before the reset (which was a mistake the last time as the rate would have adjusted down) or moved. I'm well aware of the terms and conditions of an ARM and just because you would never get one doesn't mean they're wrong for all people.

Banks aren't pushing either. My mortgage lender gave me information on ALL types of loans...and now, due to all of the people who were too stupid to read the terms of their adjustable rate mortgages, I had to sign at least 5 different pieces of paper saying I read and understood about my ARM.

[Deleted]

Jan 15, 2012 10:59:42 GMT -5 @toughtimes said:

They are phenomenally tricky as recent history proves. I was a teller during the period from 1978-1982 when interest rates skyrocketed and bankers were losing their shirts. ARMS were invented within a few years of this to make sure that next time it would the homeowners losing theirs.

how do you make it through every day looking for the bad and the depressing and the problems in every one and every thing?
ARMs are not 'trickly', provided someone can read.

[sealy]

Jan 15, 2012 10:57:56 GMT -5 @singlemominmd said:

well I guess they didn't verify that they could still make the payment at the cap of the interest.

So this means I should make sure I can make my payment at the 7.75% rate. How can I do that if I don't know exactly what my principal at the time will be.

I am so glad I asked this question I'm getting very good information. Right now I'm leaning towards getting the
ARM. I just need to ask some more questions.

Archie I can't use the download you posted until I get Microsoft office.

[Deleted]

Jan 15, 2012 11:19:46 GMT -5 sealy said:

Jan 15, 2012 10:57:56 GMT -5 @singlemominmd said:

well I guess they didn't verify that they could still make the payment at the cap of the interest.

So this means I should make sure I can make my payment at the 7.75% rate. How can I do that if I don't know exactly what my principal at the time will be.

I am so glad I asked this question I'm getting very good information. Right now I'm leaning towards getting the
ARM. I just need to ask some more questions.

Archie I can't use the download you posted until I get Microsoft office.

If it can only adjust 1% per year (unlike mine and Archie's that can adjust the full 5% cap in year 6) then you would need to plug it into a calculator to get what your principal will be at year 6, then do the new payments for that year, then do the same thing for the following years. I'm probably not explaining it very clearly.

[sealy]

I have $25,000 to put down but I'm thinking my best bet would be to take $10,000 and pay off my debts (pay off one CC, pay other one down to 20%, do my taxes to see if I'll get a refund, and then put the rest on my IRS bill) perhaps I should start with doing my taxes first. I will work on making my decision by the end of this coming week. I don't want to rush into anything. I have gotten a lot of good advice from y'all.

I didn't even think about how much my payments could go up. I don't have $3,000 to pay each month (worse case senario)

s

[midjd]

I think, based on your budget posting, you should focus on eliminating your debt before you jump into an ARM. It might be useful for you down the road, but I'd worry about getting used to that lower payment and not being able to swing the larger one when it adjusts. Better to pay down debt, get a sustainable budget that will keep you from going back into debt, THEN worry about a mortgage.

[sealy]

After doing some research and talking to sister, her husband, and y'all I think I will just get the 30 year fixed.

I also learned that I don't have to put 5% down I can put 3.5% down instead and get an FHA loan. So I will
have a savings when I move in. I already have my furniture and washer/dryer.
I won't be buying anything new or old for that matter because I want to begin my EF and pay off my debt.

Thanks for all of you input.

[ses]

I think you have made a wise decision to go with a 30 year fixed. I used a mortgage calculator and found a 250,000 loan 30 year fixed, with 3.75% down your payment would be $1148.53. Of that 32% would go to principle and 68% would be interest. This does not include mortgage insurance, taxes, homeowners insurance or any of the myriad of other expenses you might be required to pay. Your idea of paying extra to principle is a good way to shorten your mortgage. An extra $400/mo will shorten your mortgage by about 12 years and save about $70,000 in interest payments over the life of the loan. The earlier in the life of the loan you make extra principle payments the more you will pay down and the faster.

You really need to meet with a banker and get approval with your current financials. Walk into an IRS office and find out exactly what you have to do and do it.

[sealy]

Thanks ses. I also thought about waiting until summer time but I am not sure where the rates will be at that time.
I need to make a list of the pros and cons of waiting and getting what I want rather than what I can live with.

[ses]

Sealy, waiting to check with a banker until summer is your decision. But paying your tax liability is not! If you don't do it before 4/15 you are really screwing yourself and your ability to ever qualify for a mortgage with a reputable company. Tale care of your taxes now then wait 'til summer to deal with the banker if you want, but accept the fact that being a homeowner is a vanishing dream until you get these things taken care of.

Until your tax problems are cleared it won't matter if you could find a 0% loan--you won't qualify. No one will give you a loan with a tax lien looming in the future. All they will see is zero profit for them if not a loss.

[sealy]

ok ses I will file my taxes asap then I will pay them off if I don't get a refund.
I am just trying not to pay too much.

thanks
s

[pepper112765]

Jan 15, 2012 11:33:31 GMT -5 @toughtimes said:

If ARMS were not "tricky" we would not be looking at the entire meltdown of the mortgage market as happened within the last few years. By the way, this has already happened twice in my lifetime, during the 1990s as well and in both instances ARMS were a big part. When bankers come up with a product that is good for them, it is bad for you.

By the way, instead of thinking I am "negative" on ARMS, recast it as I am "positive" on fixed interest. Why would you not take advantage of an opportunity that occurs once in a lifetime to lock in almost free money for 30 years?

I think it is possibly who you got the ARM from and the idea that one could throw more money at the principle if they chose too. And a lot of people do. My 5/1 is through my credit union. I got it in 2005 and at the five-year mark it adjusted, downward. My APR right now is 3.125. It will re-set again in April, but I don't see the interest rates rising anytime soon, so I am not worried.

[MittenKitten]

I am glad you are leaning towards a 30 year fixed. With interest rates so low I think for the most part ARMs are not the way to go. Especially since this will be your first home. You will have a close idea of what your payment will be for the life of the loan. The only thing that will change your payment is your escrow, which is your home insurance and real estate taxes.

I had a friend who did a 7 year arm a number of years ago. On paper since they only planned on being there 5 years it was a great idea BUT the market tanked, they are upside down on their home and can't sell. The only saving grace is that with an ARM it can adjust down and likely did for them. It easily could have been the opposite and they would have been in trouble.