RoadToRiches
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Post by RoadToRiches on May 22, 2011 15:58:45 GMT -5
So I was watching TV and this commercial came on from some bank. It was about some 7/1 ARM mortgage refi at 3.25% or something like that. That made me think. If I am not planning to stay where I am at for more than 7 years, why not do a re-fi at this crazy low rate? Even if I planned to pay off my house, which I am still trying to decide what to do here...if you think about it..I did my math and if I double pay on my mortgage, it would take little over 6 years for me to pay it off at, I think...5.25% (I would of course have to refi to that rate)
So why wouldn't I just take out that ARM loan then? Even if I would go for paying off my mortgage by doubling up on payments, that would still be better for me to take out ARM like that at this very low rate.
Right?
So, it would be beneficial in 2 ways. If I decide to pay it off, then I get low rate and pay it off. If I decide to move, my mortgage is lower now and I can sock away the difference.
Thoughts?
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Post by Deleted on May 22, 2011 16:06:53 GMT -5
Um, because it might not be up to you in seven years whether you can sell or not? My neighbor behind me has had his house on the market for 2 1/2 years.
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Mad Dawg Wiccan
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Post by Mad Dawg Wiccan on May 22, 2011 16:07:48 GMT -5
If you know you're going to be there less than 7 years, go for it. If you're doubling the payments, be sure to make sure that one of them is specifically going towards principal reduction.
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Post by Deleted on May 22, 2011 16:08:09 GMT -5
ARM's are great for someone like you who will move before the term expires. Are you saying your current rate is 5.25%? Sounds like you'd get a nice discount which should make your break even after closing costs in the 1-2 year range. How long do you plan to stay in your current place?
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RoadToRiches
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Post by RoadToRiches on May 22, 2011 16:28:09 GMT -5
I know I will not be here in 7 years. My current rate sucks (7%) but I am working towards bringing up my FICO (paying off credit cards), then I will be able to re-fi.
I am not doubling my payments up now, but I am thinking, once my credit cards are paid off, I could have some nice options. If I did something like that (7/1 ARM), my payments would be lot lower for at least next 7 years. That gives me some additional cash to either pay off my mortgage or save up the difference.
I am not sure exactly how long I will stay, but for sure I will not be here for 7 more years. I want to move possibly out of state. I am sick of winters and I like warm climate. Right now, I am just standing up on my feet and getting my finances in order with my debt and savings. I still have lot of work to do, but at least I thought I would look into the future. So I have some time to figure out what makes more sense to me.
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Post by debtheaven on May 22, 2011 16:33:29 GMT -5
Personally, I'd rather have a sure thing. Some people do very well with ARMs but a FR mortgage gives you stable payments, and an "exit plan" if the shite hits the fan. With interest rates this low, I'd just stick with a FR mortgage. This said, where I live (France) the standard mortgage is 15 years, not 30. So with a 15Y FR mortgage you're already paying much less in interest. There is no right answer to your question. ETA: Since your credit score is going up, in a few months you might want to think about doing a refi at a lower interest rate. If / when you do, check out a 30Y loan and 15Y loan and various ARMs.
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schildi
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Post by schildi on May 22, 2011 16:54:21 GMT -5
Yeah, my thinking was similar back in 2000 when I got our mortgage. We started out with a 1/1 ARM, and then in 2003 refinanced to a 5/1 ARM. Every single year the rate has dropped without us having to refi (except of course 2003 - 2007, it was constant @ 3.9%). We are now at 2.75%, and since 2000 we paid monthly what a 30 year FRM would have cost us. The house is almost paid off, thanks to the ARM. We are facing another adjustment soon, it looks like the rate will drop to 2.625% (they round down to the next 1/8th when they set the rate).
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phil5185
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Post by phil5185 on May 22, 2011 17:13:44 GMT -5
So, it would be beneficial in 2 ways. If I decide to pay it off, then I get low rate and pay it off. If I decide to move, my mortgage is lower now and I can sock away the difference. Probably good. Here is what you must guard against. Back in the Mid-1980s, rates jumped fairly quickly to about 17%, only took a year or two. And it was futile to try a refi as the rates passed thru 8, 10, 12% and so on - the 'wait' was forever. Banks had 1000s waiting and they were in no hurry, why lend money at 12% when it appears that it will be 15% or 20% in 6 months? So, when it stopped at 17%, here was the situation. Your ARM was on the way up so it gets uncomfortable to stay - and a refi at 17% is horrible, you can't even qualify for it. So you want to sell & move - but sell to whom? New buyers can't/won't qualify for 17%. And if you did sell and move, you would need to rent, you wouldn't want a new 17% loan. So - you can't afford to stay - and you can't sell & move. Ie, options are very limited. (Unless you were a landlord, it was a good time to own 4 houses, rents were hot )
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RoadToRiches
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Post by RoadToRiches on May 22, 2011 17:37:24 GMT -5
So Phil, how can I guard against something like that then? I mean, nobody can predict the future. What would you suggest? Re-fi to 15 or 30?
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dancinmama
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Post by dancinmama on May 22, 2011 19:00:58 GMT -5
So Phil, how can I guard against something like that then? I mean, nobody can predict the future. What would you suggest? Re-fi to 15 or 30? First, it's not even a consideration until you get your FICO to the point where you can refinance. Then see were the ARMs are and make your decision. Personally I am not a fan because I do not like the uncertainty of an ARM, but IF you are fairly sure that you want to leave before the ARM is due to reset, then I'd make darn sure that I had it paid off before that time (just in case the interest rate market his the fan). That in turn would depend on how stable you think your employment will be in the "payoff years". If there was any doubt in my mind about anything, I would not do the ARM, but refinance with a fixed rate mortgage. My feeling is that at some point in the future when the Federal Reserve can no longer continue to leave interest rates artificially low, they are going to rise - how high and how soon are the million dollar questions. BUT if you have a low, fixed rate mortgage it will serve you well as a hedge against inflation - if you decide to stay because you cannot sell or if you decide to move and rent the place out. If you decided to go with the fixed rate mortgage, I would make extra principle payments to myself. In other words, save the extra money. At any point in time you can put it toward paying off the mortgage.
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phil5185
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Post by phil5185 on May 22, 2011 19:13:44 GMT -5
I mean, nobody can predict the future. What would you suggest? Re-fi to 15 or 30? Yup - a 30 yr FR loan at about 4.5% will look really good when others are trying to buy/sell/move/get creative financing, yada. So you don't have to predict the future, just lock in something that will work for you for the next 30 yrs. But you pay for that certainty, you pay a risk premium of 1/2% or so - consider it to be 'rate hike insurance'. In my case I borrow money against my houses and use the capital for investing. I want to keep my risk on the investing side of the equation so I keep my cost of money certain. What if I had 4 ARMs and invested in stocks - and my ARM payments all doubled at about the same time that my stocks plummeted? Not good - I can only manage one catastrophe at a time.
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Post by Deleted on May 22, 2011 19:21:02 GMT -5
I know I will not be here in 7 years. My current rate sucks (7%) but I am working towards bringing up my FICO (paying off credit cards), then I will be able to re-fi. I appreciate your enthusiasm, but this thread is really premature. I didn't realize your FICO is poor and you couldn't get the advertised rate anyway. If we are looking a few years down the road, your 7% current rate may be close to the going rate.
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Post by Deleted on May 22, 2011 19:23:50 GMT -5
I agree with Phil.
Given your age (35) I would go with a 30 year fixed rate so that you give yourself options. I don't really think we are going to see a dramatic change in rates any time soon given how weak the economy still is. But let's say you do find a job elsewhere in five years. Are you really going sell everything and buy something there? Maybe you want to try it out for a while first? What you don't want to do is get your back to the wall and force yourself to make a bad decision.
And let's say you don't wind up moving? Then what?
Again given your age I think it probably makes more sense for you to refi for the 30 year and split the savings between paying off your expensive debt and contributing towards your retirement. I'm guessing you're not fully funding your retirement right now, correct?
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Post by Deleted on May 22, 2011 19:29:38 GMT -5
BTW Phil those rates rose in 1979-1980 and then slowly started tracking down I think we were down to 12-13% by the mid 80s ;D
Here's a link:http://mortgage-x.com/trends.htm You'll need to scroll down towards the bottom of the page.
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DVM gone riding
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Post by DVM gone riding on May 22, 2011 21:57:51 GMT -5
I wouldn't pay them double but would rather safe the double payments, if something happens and in 7 yrs you are still in the house the int rate could be very high, then you would need to either pay off the house or refi.
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imtos
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Post by imtos on May 23, 2011 7:37:17 GMT -5
Everyone is missing something here. ARMs have Caps!
Virtually all adjustable-rate mortgages, including the traditional, hybrid, option-payment and interest-only varieties, feature caps that limit how much the interest rate--and consequently your monthly mortgage payment--can be increased when your interest rate is adjusted. These rate caps are important because they protect you from unlimited higher payments, no matter how high or how quickly market interest rates rise.
The most common ARM caps are the “initial cap,” “periodic cap” and “lifetime cap.” The initial cap limits how much the interest rate can be increased the first time it is adjusted. The periodic cap limits how much the interest rate can be increased each subsequent time that it is adjusted after the initial adjustment. The lifetime cap sets a maximum amount by which the interest rate can be increased as long as you keep the loan.
All caps are important, but for our discussion, the most important one is the lifetime cap. Right now, lifetime caps are around 5. That means that with a rate of 3.25% the highest interest that you will EVER pay on your loan is 8.25%. Granted, this is higher than your rate right now, but by NO means is close to the 17% discussed before. In summary, regardless of what happens to interest rates, you will never pay more than 8.25%.... I think that brings some comfort!
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Post by Deleted on May 23, 2011 9:51:47 GMT -5
ARMs and Caps;
True, but most people can't afford to have their house payment more than double.
I'm not against ARMs; I think they can be a great tool for certain folks who know how to manage their money. But the concern in this particular situation is that the OP is probably not in the best financial situation. I'm guessing with the debt he's not saving much for his retirement nor does he have other cash lying around. People like that need to really think through the financial risk.
I have an ARM via a property I took over from my deceased mother's estate. Right now it's at 3.25% but on a 25 year amortization schedule (she originally took out a 30 year, interest only fixed for 5 years loan). Although I would prefer a 30 year fixed loan, for a number of reasons I can't refi right now into a good loan. It hasn't been horrible; the fixed rate was at 5% so when the rate adjusted in year 6 (2009) the rate dropped to 3.75 (but amortizing the principle kicked in so the payment rose by $200/mth). Last year the rate dropped to 3.25. I'm guessing it will stay the same when they send me the new rate in August. So I am getting the benefit of a lower rate without the cost of refying. Also if I make principle pay downs before the loan adjustment date I can lower my payment for the year. I would love to have this $400k loan paid off in 10 years (by the time I'm 60).
But I'm in a really different financial situation than the OP. I have many options. I just want the OP (and others who are thinking about taking an ARM) think about the "what if" if things don't go as planned.
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RoadToRiches
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Post by RoadToRiches on May 23, 2011 10:37:55 GMT -5
ARMs and Caps; True, but most people can't afford to have their house payment more than double. I'm not against ARMs; I think they can be a great tool for certain folks who know how to manage their money. But the concern in this particular situation is that the OP is probably not in the best financial situation. I'm guessing with the debt he's not saving much for his retirement nor does he have other cash lying around. People like that need to really think through the financial risk. I have an ARM via a property I took over from my deceased mother's estate. Right now it's at 3.25% but on a 25 year amortization schedule (she originally took out a 30 year, interest only fixed for 5 years loan). Although I would prefer a 30 year fixed loan, for a number of reasons I can't refi right now into a good loan. It hasn't been horrible; the fixed rate was at 5% so when the rate adjusted in year 6 (2009) the rate dropped to 3.75 (but amortizing the principle kicked in so the payment rose by $200/mth). Last year the rate dropped to 3.25. I'm guessing it will stay the same when they send me the new rate in August. So I am getting the benefit of a lower rate without the cost of refying. Also if I make principle pay downs before the loan adjustment date I can lower my payment for the year. I would love to have this $400k loan paid off in 10 years (by the time I'm 60). But I'm in a really different financial situation than the OP. I have many options. I just want the OP (and others who are thinking about taking an ARM) think about the "what if" if things don't go as planned. Well that's the whole point for me of getting out of debt AND becoming financially responsible. So, just because I am in debt right now (which I am getting out of because I want to be financially responsible), doesn't mean that I will never be able to or be in a position to actually re-fi with ARM because I was not responsible with my money couple years ago. Right? Just because I am in debt now, does that mean I will never be able to do ARM because they are for "responsible people"? No, people change, people get smarter with their money. My whole point of this thread is to find out if it would be good for me AFTER my financial situation is sorted out. You are in a different position as me - RIGHT NOW. Give me a year and I will also have many options.
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Post by Deleted on May 23, 2011 10:50:50 GMT -5
Whoa...
I think you're interpreting what I wrote in a way I didn't mean.
I never said you're doomed! Just fully vett the risks involved. I come from a family who consistantly took on way too much risk. I did too when I was young. But I learned my lesson (and it was very painful at the time).
DH and I like giving ourselves lots of options and it's worked out well for us financially.
I think you are doing well by attacking your debt agressively but make sure you are looking at the whole picture e.g. wealth building vs just debt pay off.
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RoadToRiches
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Post by RoadToRiches on May 23, 2011 10:58:28 GMT -5
Oh I know you didn't mean anything bad no worries. That's why I want to get out of this stupid debt, so I have options. I can't wait to get to that point. It's what motivates me. I KNOW I will not stay here for 7 years. No way I will. Hell, I want to get the hell out of here before I turn 40! Just now, as I am going through my debt payoff plan, I am starting to think ahead a little, so I am ready when time comes to make those "smarter" money decisions.
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azphx1972
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Post by azphx1972 on May 23, 2011 13:55:56 GMT -5
I'm a big proponent of home ownership, but if you know you're not going to stay somewhere that long, why even bother buying? You may very well come out ahead by renting, especially if you don't think the area has much potential for appreciation (which may be the reason why you want to get out before turning 40, lol).
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RoadToRiches
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Post by RoadToRiches on May 23, 2011 14:02:36 GMT -5
I bought my place 7 years ago. Why not renting? Well, because rent would cost me actually more money for what I get. Besides, I wasn't thinking about moving 7 years ago. But as I grow older, I lean more towards getting out of here and moving somewhere without winters
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thyme4change
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Post by thyme4change on May 23, 2011 14:03:36 GMT -5
Worst case scenario you would be paying the new rate, but on a lower principal. But, houses always sell - if the price is low enough...
If you think you are going to be in the house 7 years, I wouldn't do a 7-year arm. If you think you are going to be in the house 4 years, I would do a 7 year arm. That way, you have a 3 year cushion of time.
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azphx1972
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Post by azphx1972 on May 23, 2011 14:17:40 GMT -5
Besides, I wasn't thinking about moving 7 years ago. But as I grow older, I lean more towards getting out of here and moving somewhere without winters Given that you feel differently now than you did 7 years ago, you may very well have a different state of mind 7 years from now. Maybe you'll decide to rent the place out rather than sell, or maybe you'll decide to stay due to some other unforeseen circumstances. You're asking for advice based on what we think might happen in the future, and no one can give you an accurate answer because no one knows.
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RoadToRiches
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Post by RoadToRiches on May 23, 2011 14:25:17 GMT -5
Well, let me rephrase that. I ALWAYS knew I wouldn't live here in this state. In the back of my head, I am always thinking that I will move and I really want to move.
Renting it? Sure, that's an option.
But as far as me living here next 7 years, I really don't see that happening. Past 7 years, when I bought the place, I didn't know exactly WHEN I would be in position to move, so that thought was there, but it wasn't as solid as it is now. Besides, I was 7 years younger lol
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azphx1972
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Post by azphx1972 on May 23, 2011 14:28:45 GMT -5
Ok, so what if you meet the significant other of your dreams and he/she doesn't want to move? Are you so sure that you will not be there in 7 years that there's absolutely no uncertainty regarding your living situation by then? I guess in that case, by all means get the ARM if it is in fact cheaper than renting. Sounds like a no brainer in that case, right?
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RoadToRiches
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Post by RoadToRiches on May 23, 2011 14:41:18 GMT -5
Hmmm well, good point...
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Post by debtheaven on May 23, 2011 15:22:43 GMT -5
We're May 23 ... when does the "I can't wait for June 15" thread get posted? Just teasing you LOL!
I don't have any personal experience with ARMs. This said, if you want to possibly keep your current home as a rental, I think you'd be much better off with a FR mortgage. As far as I can see there would be no point to having an ARM on a rental property you plan to keep long-term. So if you are truly considering keeping your home as a rental when the time comes, that's something to keep in mind. Of course I could be wrong about that, but that's what I've understood.
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Angel!
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Post by Angel! on May 23, 2011 16:17:28 GMT -5
ARMs are fantastic if you understand the risks & can afford the payment hike should the interest rate jump to the lifetime cap. You just need to do the math - find out the 7/1 interest rate, and all the interest rate caps. Prepare a table comparing the worst case scenario to a 30 yr fixed. Figure out how much you will save over the 7 years & what the breakeven point will be after that should rates jump. Figure out if you can afford the maximum possible payment & decide whether the potential savings is worth the potential cost.
Saying you should never use an ARM is like saying you should never use a CC. Both are tools with pros & cons. They can save you a lot of money if you understand them & use them to your advantage, but they can cost you a great deal if you don't know what you are doing.
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RoadToRiches
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Post by RoadToRiches on May 23, 2011 16:22:45 GMT -5
We're May 23 ... when does the "I can't wait for June 15" thread get posted? Just teasing you LOL! Funny that you said it.. I actually looked at the calendar and thought, I will wait a little bit for June 15th post. lol It's still so far away
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