7/30 ARM v 30 year fixed

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Submitted by gzz on September 6, 2022 - 5:58pm

the agent told me I “locked the whole rate sheet” so I can make a last minute change between any of the following:

4.5% fixed for 7 years, floating the remaining 23 years, no points, 25% down
4.62% 30 year fixed, no points, 25% down
4.62% 30 year fixed, $2000 point fee, 20% down

I was going to go with the 7/30. Good chance I can sell or refi within 7 years. And even if I don't rates could drop.

While the difference is pretty small, on a 1.2m loan that 0.125% comes to about 1500 a year, 10.5k in extra payments over 7 years. That's a ton to pay, and if you compound it is more like 13k over 7 years. So even if I refi at year 9, and the fixed rate saves me a huge 0.75% for 2 years, that's still basically break even.

The very sudden rate jump the past few weeks however has spooked me however, now I am like 50/50 between the arm and the 30 year fixed.

And why not go with the 20% DP and buy more oil stocks as long as I am locked at about 0.6% below current rates?

Submitted by sdrealtor on September 6, 2022 - 6:45pm.

Dont worry the increase in rates is transitory

Submitted by Honeybadger on September 6, 2022 - 11:15pm.

While I agree that sdrealtor is most likely right, unless planning to sell the property, there's no way I'd take option 1's very low probability but massive interest rate risk for such a low payoff. I'd rather take option 3, and then refi into another fixed mortgage if rates do indeed substantially fall in your time horizon as appears most likely. But I am risk averse, and curious what others would choose.

Submitted by an on September 7, 2022 - 8:26pm.

Option 3. All day every day.

Submitted by barnaby33 on September 10, 2022 - 7:21am.

If it's an investment I'd optimize for predictable profitability. If it's a home to live in, options 3 all day every day.
Josh

Submitted by gzz on September 15, 2022 - 8:11pm.

I got my points wrong on the first post, points on the 25% fixed was 3k and 20% was 5k.

Ended up going with the arm which was a slight negative point (like 500 lender credit) at 25% down / 4.5%.

The interest and point savings will be about 16k over 7 years before the rate unlocks. Worst case I should be able to pay it off in full or nearly so if rates soar and never go down.

My other mortgages are 30 year fixed 3.99 and 3.375 and 15 year 2.625. So this one will be an easy choice to make big extra payments on.

If in 2 or 3 years rates just drop a little, I can redo as a ~4.5% 30 year with a lower balance and better LTV, and that way grab a locked rate after saving a bit initially.

I might have switched to fixed if even with these considerations, but when I called to get the exact numbers the agent said I was already fully approved and clear to close, and any changes could have a small chance of delaying closing.

I am feeling increasingly that I will never sell the property even if I move out. Being unincorporated means very low chance of vacation rental restrictions and its size and acreage and distance from neighbors mean it has potential as a wedding rental, at least according to the lady from Vacasa I talked to who said it was comparable to such places she manages. I also getting excited about taking the current 8 tree valencia orange and tangerine grove up to 20 trees, starting with my favorites, red grapefruit and gold nugget tangerines. Plus some guava and black plum which have been prolific and low maintenance for me in OB.

Direct quote from vacasa manager: “Oh that’s great we love unincorporated!”

Submitted by barnaby33 on September 16, 2022 - 8:31am.

So when's the house warming party? SDRealtor can bring wine!
Josh

Submitted by sdrealtor on September 16, 2022 - 11:31am.

barnaby33 wrote:
So when's the house warming party? SDRealtor can bring wine!
Josh

Its sdrealtor and you dont like my wines anyway LOL

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