ARM vs fixed rate mortgage in post-trump era?

[ponderinventing]

hello everyone!

as a soon to be transitioner from fellow to attenting doc, i am trying to figure out what the best mortgage product is for our new home. i know that buying a home is a personal decision for everyone, but in our situation, it makes the most sense (we actually already own a condo, and we are renting it out once we move)...so thanks in advance for not bombarding me with that kind of advice (i.e. rent vs buy)...we've already decided! i've already experienced an ARM mortgage, as well as a fixed rate mortgage, and i understand the advantages and disadvantages of both.

my question is this, however:

the 30-year fixed rate mortgage will save us several hundred dollars month, which is definitely going to help right now, as compared to the 7/1 or 10/1 ARM. i'm pretty certain that mortgage rates will continue to increase steadily. what i can't figure out, however, is just *how high* the mortgage rates will likely climb to in the next X years. that is, when would it make sense to refi to a fixed later. the extra savings will help A LOT right now, but probably won't be as important in 5-10 years, which is when i'm thinking of refinancing.

so...does it make more sense to bite the bullet, get the higher rate fixed (it would be 1.25% difference) but have to pay more each month now? or save the $ now, and refi later, even though i know the rate will be higher?

what are people's thoughts?

thanks!

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[tartesos]

I would do fixed 30 years now, and if rates are better in 5-10 years you can always refinance with no down payment( 20% down) in most cases.
Again that is me, some people may feel different.

 

[jacksparrow82]

Fixed is definitely better. The fed is expected to continue to raise its interest rates which means mortgages will surely go up. They are still historically low right now. Lock in a rate now. During the Reagan years interest rates were crazy high (like 13% and up). It's possible that could happen again. No one knows when or if that will happen again, but it could. Right now they're around 4% for 30 years. That's pretty darn good. If you can afford a 15 year loan you could get a better rate and it will save you tens of thousands of dollars over the life of the loan. Many financially savvy people will tell you that you can't afford a home unless you can afford a 15 year loan. Something to think about The WCI says that a mortgage should never be more than 2x your yearly salary. So if you make 250k/yr, you shouldn't have more than a 500k mortgage. A 500k mortgage will buy you a $625k house assuming a 20% down payment of $125k (if you want a house worth more than that you have to put down a bigger down payment).

 

[InvestingDoc]

I'm in a similar position now. I'm looking to buy a house and noticed that the 30 year fixed have a slightly higher APR. As other people have mentioned, rates are at an all time low historically, and will most likely rise in the future. Ten years is a long time. Rates might be 8% then, the same, or they could be 2% in 10 years. I don't think I would be able to rest comfortably at night knowing that my mortgage payment could double depending on what happens 10 years from now. But hey, my risk tolerance may be a lot lower than yours. Two of my physician friends determined that the 10/1 ARM was better for them because they bought a "starter" home ad plan to sell somewhere between 5 to 10 years from now. They are choosing to take the risk that they know they will not be in that house more than 10 years from now and that they will be able to sell it for possibly more than they bought it for. I'm choosing to take the either 15 year or 30 year fixed with a goal to pay it off early.

As someone above mentioned, there is the option to refinance if rates were to go lower. The one catch to that is that the house has to be appraised at whatever you are going to refinance for. Lets say you bought a house in 2007 for $500,000 and rates dropped after the financial crisis in 2008. Well your house may be worth now $300,000 post financial crisis. This would mean that you would have a really hard time getting a bank to extend themselves to refinance a loan at a higher amount than what the market rate is for said house. If you stopped paying on the house the bank would automatically be out at least $200,000 in this example. So while refinancing is an option in the future, there are some situations where that may be more difficult than it initially appeared.

At the end of the day you have to decide what your living situation may look like in 10 years and what your risk tolerance is.

 

[fahimaz7]

I am in the process of doing a 7-1 arm instead of a 30 year fixed. This is going to save us ~450/mo and allow us to pay down student loans faster. With that said, I'm doing an extra payment each month so the loan is essentially a 15 year mortgage. In 7 years I'll owe significantly less on the principle than I would otherwise and be out of student loan debt.

For us it made sense financially. Who knows if we will still be in the home in 7 years...