First time home buyer.  740+ credit, wife is 698 I believe.  Have to put her on loan, home price is about 10k more than my income will allow, so I'm told they will use her credit score.  Anyways, house is 265k.  10k Down.  96.5 LTV/98.25 CLTV

3.875 5/1 ARM with 0 points.  1520/month

5.125 Fixed with 1/8 point. 1720/month

Payments include PMI/Taxes/Ins.

No idea how long we will be in this house, probably be looking for something else after 5-6 years, but nothing certain.

Lender says the 5/1 ARM is 1/1/5.  I understand it's locked for 5, then can go up 1% each year, but not sure what the cap is?  1/1/5, is that 1% per 1 year with 5% cap? So a max of 8.875%?

Probably over paying for the house in all honesty and will have to fork up some cash to resale after 5 years.  We really like the house and are willing to take that hit after 5 years if we decide to move.

Is this about as good as I'm going to get, or should I keep shopping?  I have been leaning towards the ARM, based on what I've said, does that seem like a good idea?

Thanks in advance,

AR

I'd have a hard time recommending an ARM in today's pricing environment.  Rates are at historic lows and a 30 year fixed rate of 5.125% is really strong.  That being said, if you are fairly confident that you will be selling the house within 7 or 8 years then the ARM makes sense.  I would just be sure you are really confident, because 5 years from now that ARM will start to adjust upward and you could easily be looking at a rate of 6.875% in year 8 on that ARM.  You have the terms of the ARM correct: max 1 point increase each year after year 5 and max increase of 5 points over the life of the loan. 

Again let me re-iterate...be VERY sure you are going to be moving out within 7 - 9 years.  If there is even a 20% chance you could be there over 10 years, I, personally would recommend the fixed rate.  Good luck!

Chris brought up a very good point.  Unless you are certain that you may move in 5 to 7 years, fixed rates are almost at historic lows.

If you have an accountant or financial advisor, you may also want to get their opinion.

Good Luck.

SDMOrtgagefinder

Over 84 months the savings on an ARM would be over $19,000 and even taken out to 96 months it is still over $16,000 cheaper. In fact, the fixed does not catch up with the arm until month 125 (Over 10 years) from a total cost perspective, and this assumes a "worst case scenario" with the ARM rising to its maximum rate in the minimum alloted time.

One other possibility to consider is that making the same payment on the ARM as would be required on the fixed gives you an additional $23,000 in principal reduction over 6 years. This would help from a payment standpoint if you decided to get into another ARM or even a fixed rate down the road should you decide to stay in the home a bit longer. Moreoever, you were a bit concerned about the price, and this would be a consideration to chip away faster should you need to sell in 7 years or so.

As I mentioned the 5/1 FHA Arm is a great product if you feel pretty good about your length of time in the home largely because of the 1/1/5 caps.

The same cannot be said of a conventional ARM.

Thanks,

Jason