5/1 ARM vs. 30-yr Fixed

I know everyone out there says ARMs aren't worth it with 30-yr rates so low, but I believe my situation may be different.  Here it is:

My company's paying for me to go to school out-of-state (in Indiana) and I have a 5-year contract with them, after which I'll be moving back out west.  As such, I know that I'll be in the house for no more than 5 years.

Given this, it's hard for me to see any downside to an ARM...  Maybe you guys can tell me something I hadn't considered?

Seems that you are one of those [rare] people that it makes more sense to get a 5yr ARM.

Well..... to give you a f'rinstance..... we can offer a 5/1 FHA at 3.875% with 1 point.  The comparable 30 year fixed would be at 5.25 with a point.  The difference in payment on a 150K loan is a little more than $100.

One thing about the FHA arms that alot of people seem to forget is that they have a 1/1/5 cap rate structure, which means that they can go up no more than 1% a year.  Most conventional 5 year arms have a 5/2/5 cap rate, which means that they can go up by as much as 5% on the first adjustment. 

The only real downside to it that I can see is that there's going to be a decent chance you won't sell the home right away.  Who knows what the housing market will be like in 5 years.  Could you get an offer within the first week and sell it in a month?  Sure.  Could you not find a buyer for 6 months and than have to consider getting renters in there to help stop the bleeding?  Sure.  You may not want to get renters, but if your rate starts adjusting and you're having problem meeting the payments than you may not have a choice.

If you were seeing some big savings on the ARM than maybe it's worth the risk, but most of the ARM rates I've seen are not much better than a fixed.  What are you being quoted for each? 

I am getting a conventional loan with 20% down...  I've never looked into FHA, but on a Conventional yesterday I was quoted:

 5.35 vs. 4.875... both with 1 point.  Not a huge difference.  That's why I'm trying to see if there's anything I'm missing.

Juan Boldizsar:

we can offer a 5/1 FHA at 3.875% with 1 point.

How can you offer that rate?  That's way below the 5/1 conventional loans I've seen.

Scott Westemeyer:

there's going to be a decent chance you won't sell the home right away.

Why do you say that?

FYI- A lot of lenders stopped doing FHA ARM products recently. I'm sure there are still some out there, but my company is not one of them.

Jay, I have a 4.375% on a conventional 5/1 arm for 1 point (origination) as the PAR rate. Keep shopping and I'm sure you will get a great deal.

What do you mean by PAR?

(newbie here)

Sorry Jay, didn't mean to be flippant there, I should have just said there's always a chance it won't sell right away.  In the current market, a lot of good houses are sitting on the market while everybody is looking for the deal of the century.  I'm assuming in 5 years we'll be back to normal, but assuming something and than making an invesment based on that could be risky.

I'm not sure what the current stats are for home sales in Indiana, but a fair guesstimate would be 3 - 5 months listed on the market before it's sold.  Most people do not sell their house within a month or two.  Look at the worse case scenario for how long it will take you to sell it and what the payments will be when the rate starts to adjust and compare it with your monthly savings by going with an ARM.  You will have more flexibility in selling the home since you'll have at least 20% equity in the home so you can always take a loss if for some reason you can't sell it at fair market value.  But once again, who knows what your home will be worth in 5 years. 

You will have a cap on how much those rates can adjust, so as long as you're okay with covering the first year's worth of adjustments, than I think you've sufficiently covered the worse case scenario.

PAR = The lowest interest rate used as the reference point for which a mortgage lender will neither pay a rebate (yield spread premium or negative points) or require disount points for a mortgage.

In other words, the rate that the banks lend the money at for the day (or hour with this market).

The only factor would be how long it would take you to sell.  The 1st adjustment of many 5/1 Conforming ARMs can be as much as 5%.  Could you handle the additional payments that type of rate would bring, even if it was only for 2-6 months?

A 7/1 ARM or an FHA 5/1 ARM might be a better choice.  FHA ARMs cannot chnage by more than 1% each year.

Kent Mikkola:

FHA ARMs cannot chnage by more than 1% each year.

Would I qualify for this?  What are the drawbacks?

I'm a first-time homebuyer with 20% down...

The only drawback is you will have mortgage insurance on a 30 year even if you are under 80% of the purchase price.  You may want to just put less down and save the difference.

Well here my situation.....I'm a first time home buyer and currently applying for a home loan thought BOA.  I'm a U.S. military active duty Marine and will be using my VA benefit's for this loan.  As of now, I'm applying for a 30 year ARM VA 5/1 1-5 loan at 4.375 and wanted to know if I'm getting a solid deal.  The total cost to the home is $326,000 and total monthly payments w/taxes/HOA etc...will be $2,100 fixed for the next 5 years.  As I read earlier....once it's time for the loan to adjust....it can only adjust 1% a year and the max is a total of 5%?  I'm new at this and wanted to learn/know what I'm getting into.  I have about 7 years left before retirement (20 yrs of service) and the military pay's me $2200 a month for off base housing, so I'm thinking that in 5 years from now went this rate (4.375%) adjust by 1% (5.375%) it will not affect me as much (maybe a $100 or so), right????  Somebody help me on this one! 

The payment change would be about $200/mo for a 1% change in rate on a loan amount of $326,000. 

Juan Boldizsar:

One thing about the FHA arms that alot of people seem to forget is that they have a 1/1/5 cap rate structure, which means that they can go up no more than 1% a year.

This really peaked my interest today...but I am finding 2/2/6 cap rate:

http://portal.hud.gov/portal/page?_pageid=73,1827597&_dad=portal&_schema=PORTAL

Anyone got further clarification???

Well..... Taylor Bean offers the FHA 5/1 with 1/1/5 caps..... I can forward you an image from a recent rate sheet if you like.....  perhaps some other lenders have different caps..... they are the only ones I look at for the FHA arms.

The lenders that I use regularly have 1/1/5 caps on all hybrid ARMs, but the info you found is correct.  I guess I forget that HUD allows for "more liberal" caps.