We are new to this and trying to see what would be our best options for our primary residence mortgage-
$900,000 mortgage
3.625% int - 10 yr arm - $7,000 closing costs
4.00% int - 30 yr fixes - $7,000 closing
Both our credit scores are above 780.
We are planning to keep this property for at least 10 to 15 years, if not more. Me and my spouse are in late thirty and mid forties and have a kid who will go to college in 10 years.
I am leaning towards 10 yr arm and spouse towards 30 fixed, reasoning from her is, if we refinance we end up paying more interest and longer term. I want to do the 10 yr as the interest is low and we don’t know in 10 years we may rent it or sell it for an upgrade or downgrade.
Interest rates are near record lows. The odds are pretty high that when the 10/1 ARM expires rates will be higher. You can always take the 30-year and just pay extra every month. Personally, paying down a 4% mortgage doesn’t make sense unless you’re close to retirement. Locking in a 30-year at 4% now gives you a lot of flexibility in the future. It’l be easier to keep the home as a rental if you want, since you locked in the low payment now.
Discussed with a coworker on this very topic in the past. He opted for 10 year ARM because he’d rather use the extra interest he saves and puts it towards his principal. His position is that if he is still keeping this house after 10 years he can refi to a 15-yr fixed loan at that point in time.
That’s true, and if it’s much higher he’s arguing that the fact he paid down his principal significantly during the first 10 years will make it a zero sum event.
I totally agree with Jil here. I don’t like surprises down the road and rather sleep easy knowing what my interest will be 1 yr, 2 yr, 5 yr. If it goes down significantly you can always refinance.
What if the difference between the current ARM and a new 30 yr fixed is 1.125? Does it still make sense to refinance and get into a fixed rate? Mortgage amount is the same as OP.
I needed to talk to my mortgage broker since I may have found my private sale home, so I forwarded your quoted rates to her for comparison. She said those are good rates for primary and that you should lock in asap as rates are on the rise. Good luck!
Your colleague should open a spreadsheet and do a break even analysis to understand at what pp rate increase is it a zero sum event and then make a bet on whether they think rates would raise more than zero sum threshold.
