So I'm looking for a new place. Would like to buy if possible, but not sure if it is a good idea over renting right now. Never owned before, never had a big loan either, but my credit is excellent. Thing is, I might be moving again in 3-4 years.

I have only heard about ARM mortgages recently, and they sound good to me because they seem tailored for people who might want to sell or move in a few years, (which is the situation I am in).

Any advice on ARM vs. regular mortgages?

ARM stands for adjustable rate mortgage.

Are you asking about an adjustable rate mortgage mortgage?

When you apply for one, do they give you a PIN number? Do they need your SAT test scores?

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In the words of DharmaDog: "it may or may not be utter horse@#$%&, but it shouldn't be dismissed simply because it doesn't agree with your opinion."

Never underestimate the power of stupid people in large groups.

Trying is the first step to failure. -- Homer Simpson

Thanks elmo. Very informative.

Would you prefer that I post my question as:

"Practical advice on ARM?"

Does that make any sense to you? When in doubt, I tend to post more information, even if it is redundant.

If you know for CERTAIN that you will be moving in 3-4 years then an ARM loan or interest-only loan may be a good choice for you. The risk is you never know what the market or interest rates are going to do down the road.

My wife and I lucked into a 3.9% ARM a few years back when we decided to refinance our current home. We were set on getting a new home within the 5 year ARM period and we did. It saved us almost 2% interest vs. a fixed mortgage and several thousand dollars over the 4 years we had the loan.

Do your homework and talk to various lendors. Make sure it's what you want to do.

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MacBook Pro 2.0GHz quad-core Intel i7
IMac 27" 3.4GHz quad-core Intel i7

If you are 100% sure you will have sold your house before the fixed-period of the ARM is up, then, yes, they may be a good idea.

Else, in this rising rate economy, you can find your nice 5.625% 5/1 ARM suddenly jumps to 7.625% in month 61. That's a worst case scenario, though.

So, let's look at some rates for $100,000 loan, assuming no money down:

Type, Rate, Monthly, Total*, Balance*, Principal*, Interest*
3/1, 0 points: 5.625%, $576, $20736, $95818, $4221, $16515
30 fixed, 0 pts: 6.375%, $624, 22464, 96337, 3668, 18796
15 fixed, 0 pts: 5.875%, $837, 30132, 86355, 13641, 16491
10 fixed, 0 pts: 5.625%, $1091, $39276, $75642, $24342, $14934

5/1, 0 points: 5.625%, $576, 34560, 92613, 7408, 27152
30 fixed, 0 pts: 6.375%, $624, 37440, 93476, 6532, 30908
15 fixed, 0 pts: 5.875%, $837, 50220, 75830, 24163, 26057
10 fixed, 0 pts: 5.625%, $1091, $65460, $56970, 43003, $22457

7/1, 0 points: 6.000%, $576, 48384, 89027, 11003, 37381
30 fixed, 0 pts: 6.375%, $624, 52416, 90227, 9785, 42631
15 fixed, 0 pts: 5.875%, $837, 70308, 63998, 35994, 34314
10 fixed, 0 pts: 5.625%, $1091, 91644, 36080, 63882, 27762

* These are the values at the end of the fixed-rate portion of the ARM

Let's look at the 5 year ARM. Your monthly payment is 576. Over the fixed rate portion of the mortgage, you will pay 34560. At that time, you will still owe 92613 (on 100000 borrowed) and have paid 27152 in interest. Assuming your house value does not change in that time period, it will have cost you 26957 (total - (int * .28)) to buy 7.5% ($7408) of your house.

Compare that to the 15 year fixed. Your monthly payment is 837. Over the fixed rate portion of the mortgage, you will pay 50220. At that time, you will still owe 75830 (on 100000 borrowed) and have paid 26057 in interest. Assuming your house value does not change in that time period, it will have cost you 42924 (total - (int * .28)) to buy 25% ($24163) of your house.

This is not to say one mortgage is better than another... I just provided these numbers for comparison.

I always look at the first several years of a 30 year mortgage (and the ARMs upon which they are based), as you are basically renting your home. Look at the numbers for the 30 year and 5/1 ARM - it is costing you $400/mo to own 6.5% of your house over 5 years. Compare that to the 15 year after 5 years. It costs you $300/mo to own 25% of your house. (This makes several assumptions - (1) you mortgaged almost the entire value of the house and (2) "cost" means transferring an asset to someone else - when you put more money into the principal of a mortgage, it doesn't really "cost" you anything, it just moves an asset from a liquid form (cash) to a long-term vehicle).

I don't know your particular situation and I don't claim to be giving you any advice on what to do, I am just pointing out some results of some calculations that you might want to look at.

Sit down with a financial calculator and punch in different numbers and look at the amortization schedules. There are a lot of different paths you can take and there is no way you can say with 100% accuracy that any one path will end up being the best - all you can do is make the best choice with the information you have.

Some other options you may want to consider:

If you have less than 20% to put down, you will be paying PMI (mortgage interest). See about doing an 80-15-5 or 80-10-10 (that's "80% primary mortgage, 15% secondary mortgage, 5% down"). This way, you don't have to pay PMI and don't have to worry about getting your house reappraised when you think you have at least 20% equity (the PMI doesn't automatically stop when yo pay 20% of your mortgage off). When we did it on our first house, we ended up saving about $50 / mo.

If you want to go with a shorter term fixed-rate, but don't want to take on the risk of having to pay a higher payment each month in case things go bad, consider taking a longer term mortgage, but pre-paying an amount equal to a shorter term one. For example, say you think you can swing the 10 year mortgage above, but don't want to take on the risk of having to pay almost double each month. Get a 30 year and prepay and additional 467 toward principal. If you need to cut back a month to the non-prepay rate, you can without issue. Over the life of the loan, it would cost you an extra 6 monthly payments (around $6k) to do this. On the flip side, it would save you around $110k in interest over a full 30 year mortgage.

- Shadow

Shadow, that is one information filled post!!! Kudos!

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MacBook Pro 2.0GHz quad-core Intel i7
IMac 27" 3.4GHz quad-core Intel i7

Thanks guys, very much.

I guess this will all come down to how much I can qualify for / afford. The cheapest homes in my area start around 250K, so my figures will be a bit higher than your example, but that will only magnify the differences you have pointed out.

great resource - [www.bankrate.com]

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One other consideration is whether you'll be able to recoup your transaction costs if you, in fact, move in 3-4 years. If housing prices stop their upward movement, you really might be in a bit of a hole when all is said and done. Of course, that depends on the local housing price movement, how much renovation/remodelling you do, and whether you'll use an agent to sell your house. Might be better to rent until you have a better idea of the future.

Here's something on the issue: [www.nytimes.com]

mikebw Wrote:
-------------------------------------------------------
> Thanks elmo. Very informative.
>
> Would you prefer that I post my question as:
>
> "Practical advice on ARM?"
>
> Does that make any sense to you? When in doubt, I
> tend to post more information, even if it is
> redundant.

How about just "practical advice on adjustable rate mortgage"?

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In the words of DharmaDog: "it may or may not be utter horse@#$%&, but it shouldn't be dismissed simply because it doesn't agree with your opinion."

Never underestimate the power of stupid people in large groups.

Trying is the first step to failure. -- Homer Simpson

elmo3, here is a nice set of pliers that you can use to pull that bug out of your ass:

POMTL...


cheers

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Bill
Flagler Beach, FL 32136

Carpe Vino!

Fermentation may have been a greater discovery than fire.
— David Rains Wallace

$tevie Wrote:
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> elmo3, here is a nice set of pliers that you can
> use to pull that bug out of your ass:
>


You know, maybe one day they'll fix this forum so that people like me--who have turned off images--will at least get the link to the image.

Until then...you're apparently wasting your time. Oh--there's no surprise.

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In the words of DharmaDog: "it may or may not be utter horse@#$%&, but it shouldn't be dismissed simply because it doesn't agree with your opinion."

Never underestimate the power of stupid people in large groups.

Trying is the first step to failure. -- Homer Simpson

$tevie - that isn't a bug, its a head, and those pliers need to be the size of the Hindenburg zeppelin.