Mortgage help

[plutosmoon]

I'm buying a house, and was planning on a standard 30 year fixed rate mortgage, 20% down. Rate is 7.125% on the 30 year mortgage. The bank (local credit union) called and offered me a 15/1 adjustable rate mortgage with a 6.5% rate, it's fixed for the first 15 years and then adjusts annually. Am I missing any potential drawbacks to this adjustable rate? It seems like a better option, and I can pay the savings to the principle. At some point in 15 years interest rates could drop and bit and I'd be able to refi. 15 years seems a reasonable risk, but I feel like there is a catch I'm missing. In case it matters, the purchase price is $250,000 and the loan is for 200,000. I'm almost able to budget a 15 year fixed, but it'd be way tighter than I'd like.

[wildrice]

How much is the annual adjustment cap after that? If it's reasonable, I think an ARM might make sense here. I agree with you that it is unlikely that you will be unable to refinance at any point in the next 15 years.

The only danger, I guess, is that you could end up losing home value and if you are underwater on your mortgage you will be unable to refi without bringing cash. However, with 20% down and 15 years before this would be come dire, it seems unlikely to me that your house will lose so much value that you'd ever be underwater. Not impossible, but not likely.

[womet]

You might want to look into whether you can prepay points. We were able to get a 5.99% rate on a 30 year mortgage doing that. You could always overpay each month to pay off the house more quickly.

[plutosmoon]

Max adjustment is 2% a year, and capped at a total of 6% over the initial rate. I could lose value, but hopefully by the time 15 years hits I'll have enough equity that a drop won't matter too much. Pre covid this house probably would have been in the 160k-180k range, so even if I lose value it's unlikely I'd be so far underwater that refinancing wouldn't be possible. I think I'll plan to save the difference between a 15 year fixed payment and this payment, so in the event of a huge crash, I'll have cash to pay it down. In 15 years I'll be just about 60, DD should be done with college and hopefully on her own, so I'll also have a lot more disposable income to attack any remaining mortgage. I think I'm going with this.

My credit union doesn't offer points. I prefer to use them since they don't sell the mortgage and service it directly. I know in my previous mortgages points didn't make a whole lot of sense, but I was dealing with lower rates and balances.

[plutosmoon]

Jul 14, 2023 10:29:25 GMT -5 womet said:

You might want to look into whether you can prepay points. We were able to get a 5.99% rate on a 30 year mortgage doing that. You could always overpay each month to pay off the house more quickly.

They don't offer any points, my first mortgage points were very expensive, and when I did some math it was a wash. I'll ask to confirm and do some math to see if it makes sense.

[dr.girlfriend]

I don't know too much about ARMs, but (and I know there's no predicting) but when we bought in 2008 we were at 6.75% (30-year fixed). I can't remember when we did our first refi down to 4.875% (30-year fixed) -- it was only a year or two later -- but by 2012 we were at 2.75% (15-year fixed). A historic low, I know, but I hope that rates are going to fluctuate significantly in at least the next 15 years and thanks to this board hopefully we tend to know when they dip. I would do the ARM and split the savings between paying down principle or maybe saving up to jump on a refi.  Maybe get an estimate of refi costs and already have the math done and a lender in mind for how low you would want it to go before you refi again so you can just pull the trigger when it hits.

[plutosmoon]

Jul 14, 2023 11:13:05 GMT -5 dr.girlfriend said:

I don't know too much about ARMs, but (and I know there's no predicting) but when we bought in 2008 we were at 6.75%. I can't remember when we did our first refi down to 4.875% -- it was only a year or two later -- but by 2012 we were at 2.75%. A historic low, I know, but I hope that rates are going to fluctuate significantly in at least the next 51 years and thanks to this board hopefully we tend to know when they dip. I would do the ARM and split the savings between paying down principle or maybe saving up to jump on a refi.

This is a good idea. My first mortgage in 2007 was 6.625, we refied in 2010 to 4.5. My last house was in the high fours in 2018, so mortgage rates are super unpredictable. I've always been nervous with ARMs, my parents had an ARM in the 1980/90ss that was really bad and the FBI was involved, I still remember the agents coming to our house. My parents allso drilled into me don't mess with ARMs, but even my mom thinks this doesn't sound bad. Thanks!

[lolalolalola]

I’m always surprised at the fear of ARM’s as a Canadian- most of our mortgage terms are for 5 years (and I think 10 is the max term). So we are only ever locking in rates for 5 years anyway. And we have to pay huge fees to break our mortgages if we want to refinance when rates fall.

From what you posted it seems like a no-brainer since you will likely be able to refinance within the next 15 years, and if not you will have lots of notice. Plus you said it can only increase by 2 points per year which really limits the impact.

[Susie]

We've originated 4 different mortgages in our home owning life:

6.125% for 30 years (2008 purchase)
4.375% for 30 years (2010 refi)
3.250% for 20 years (2019 refi)
2.750% for 30 years (2021 purchase)

so as between your existing options, I'd bet on the ARM with a plan to refi later.

Before committing though, I would at least check on what else is out there.  I get the desire to stick with a credit union/lender who doesn't sell the loan.  Our 2019 loan was with our credit union, and if rates are equal, it's nice to have it local and "in house" with the rest of our banking.  I'm not willing to pay much for that privilege though.  When we bought in 2021, we got our preapproval from our credit union, but when it came time for approval and rate lock, their rates had risen noticeably.  I shopped around, and could beat their rate by 0.5 to 0.75% by working with a broker.  Over 30 years, that's too high an opportunity cost to stick loyally with the credit union.  

Our purchase loan was with HomePoint Financial who I'd never really heard of before.  Within a year they sold the loan to Freedom Mortgage.  For all the stories of how awful lenders can be, and having your loan sold, it was totally seamless.  We also went through a process with HomePoint about 6 months after purchase, to recast the loan and remove PMI, using the proceeds from closing on our old house, which occurred after purchase of the new house.  That also went totally smoothly.  #noregrets 

[RockNVoll]

I've done both a 5/1 and 7/1 ARM in my borrowing history so clearly I'm not averse to them. In both cases rates eventually moved downward and we refi'ed to a 30-year before the adjustment periods kicked in, so they were absolutely the right call for us. The only catch is that you'd want to be diligent about staying on top of rates and actually doing the refi if the opportunity arises.

I don't think I've ever even heard of a 15/1 ARM. Do you plan to stay in your house that long? I'd actually be willing to roll the dice with a 10/1 (maybe even a 7/1) if I were buying today, but your risk tolerance might not be the same as mine.

[heyyounotyouyou]

At this time I would totally do a 15/1 arm without a second thought.

[plutosmoon]

The product is a non standard option offered by my credit union, I'd never heard of it and I don't think they advertise it. As part of the offer, they also offered the option to put 10% down while waiving pmi, I skipped that part of the offer. I do plan on staying in this house at least 13.5 years (when I plan to retire from my current job in higher ed and downshift my career to part time financial aid consulting), but life happens so who knows.

I decided to go with the 15/1, application is in, with a plan to put away $500 a month (the difference between this payment and a 15 year fixed payment) once things settle after my move. If I can't refi before 15 years, at least I'll have a lot of money to throw at it. DD is leaving aftercare in September, so that frees up a bunch of money in my budget.