Should I go with 10/1 ARM or 30 year fix for primary home

I have taken few mortgages including primary and rental property at 30 year fix. I’m thinking of re-financing our current primary mortgage with $1M loan amount. I’m getting 30 year at 3.5 vs 10/1 ARM @3.125. Payment difference for monthly can save me $206 which I’m planning to put it extra towards my principal.

Based on my calculation 10/1 ARM makes sense.
$1M @ 3.5 = $4,490
$1M @ 3.125 = $4,284

10/1 ARM Loan balance with extra payment at 10 year will be $737,000. Max cap for the interest rate is $8.125.

If I re-cast my loan at year 10 assuming interest rate is really high and is at 8.25 will put my 5,259 . Assuming higher interest rate means higher inflation means higher salary. So value of $5259 is about same as $4284 as of today’s dollar value.

Given interest rate history do you see its going that high in future ?
Am I missing anything in my calculation ?

I’d asked something similar, and response was that you never know how long you’ll be in the house. Though I think people were fine with both 30yr fixed and 10/1 ARM, but recommended against points that have a payback more than 3 years.

I think we intend to do a 30 yr fixed. The cash difference isn’t enough to me to want to force myself to refinance in 10 years. And I think we’re paying $5K for the refi, so that’s 2 years of the $200/month meaning that you’re only saving for 8 years = 8yrx12monthsx$200=$19200. It’s not chump change, but I kinda want to not have to worry about it in year 10.

One thing for us, though, is we’re in our early/late 40s. So retirement is going to happen in less than the 30 years. That part does make me wonder if we should just do the 10yr ARM. Plus I don’t know if we’d downsize once the kids are in college. We’ve got a 5BR.

for last primary home we got 30 year fix assuming we will be there forever or rent it out. Ended up selling @ year 10. For this home we see our self retiring and enjoying space with kids and grand kids. So Expecting it to be longer term unless in 10 year house appreciate nicely and we move out of bay area. Planning to aggressively pay off or reduce my loan balance as I’m in low 40s. We do not have any out of pocket re-fi cost. I’m sure we are paying it one way or other somehow through higher interest or otherway.

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You will be debt free after 10 year you do what you feel like. 50 something is about right time not have to worry about a mortgage.

A high % of Americans who have lived in the same house for many years end up with a job loss, and forced retirements, and a large mortgage not paid off. A client is losing her home because of health, refin, Heloc. Her 2 mortgages combined are 2.5X what she paid for the same house.

sounds like she sold the house already. I’m not judging the situation. I have extracted equity myself, to find out that even with a value increase from 600k to 1.6m, at closing I got only 100k.

My 50% business partner keeps complaining about that particular sale… she got something like 50k cash but 500k capital gains reported.

@BAGB take note. Is why I have been telling you, the simplified way of computing gain in RE is incorrect. Worth is inflated as in this case to $600k but is actually $100k only.

10/1 ARM Loan balance with extra payment at 10 year will be $737,000.

Market believes that interest rate hence mortgage rate is in a secular decline because money is depreciating i.e. getting worthless. Hence 10/1 ARM might work better than fixed. Having said that I did ARM when I was around 40s too but no longer on ARM. I re-fi to 30-year fixed. Have not researched on ARM recently, do you need to pay a penalty for early redemption? Possible if you want to move elsewhere and need to sell the house.

Assume this is because of a cash out refi + depreciation? What was your loan balance when it was sold?

I’m trying to stick to cash out refis + 1031s to continue to leverage but avoid capital gains. Eventually the RE will go to the kids and they will get a step up basis.


the loan balance was over 1.4m, and, yes, recapturing the depreciation taken over 5 years just increased gains.

When I said originally “sounds like she sold the house already”… I meant that the owner sold … to the bank, in a way. Of course, still on title. But it can be a unpleasant surprise if you get a tax bill and no cash in hand.

That’s the problem that I have with my 50% partner. She does not comprehend that equity and capital gain are completely independent things. I should add that she literally is a rocket scientist (worked on Chinese aerospace program), but also has an MS in C.S. and an MBA, both earned in the USA. She mentions this at times when she tries to convince me that we don’t need to pay taxes because we did not receive (significant) cash at closing.

Along this school of thought, she also likes to deduct the full PITI payment against her rental income instead of “I” only. Property taxes or insurance are claimed separately (double), of course.

Excuse the rant, but I just got off the phone with her about this.


I think for now, that’s a solid strategy, esp the thought of kids getting the higher basis. Personally, I do the same. Tax law can change of course, then we would need to adapt.

I get your frustration. Sounds like a visit from the tax man may be in order…if she were my partner and putting our mutual assets at risk of increased scrutiny this way I would be pissed!

Not knowing your partner I suspect she knows exactly what she is doing. In the unlikely scenario where she is caught, it is better to feign ignorance than overtly break the law. She will likely come out ahead with her strategy. What is the saying? Heaven is high and the Emperor is far away.

Noted. Don’t do CS and MBA in USA. She needs to do some accounting courses to understand what is accrual accounting. How does it differs from cash accounting. Wait, she has a MBA, she failed the accounting courses?

MBA is only managerial accounting. You cover balance sheet, income statement, and how to bridge that to cash flow. You don’t get into actual debits, credits, etc.