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Mortgage advice: 15/1 ARM pay off aggressively vs 15 year fixed

Home Mortgages and Home Buying Mortgage advice: 15/1 ARM pay off aggressively vs 15 year fixed

  • Avatar bk121508 
    Participant
    Status: Physician
    Posts: 5
    Joined: 04/05/2017

    Hi All,

     

    First time home buyer. I’m a fellow starting new job in July. I’ll start by saying I’m a fairly frugal person and would rather rent pretty cheap, but my wife is fed up of renting and I cant convince her otherwise. We are moving back home, know the area very well, and she does have a very good stable job with her company so it makes me feel a little bit better about it. Anyways….

     

    I’d like to purchase a home around 500K. We have been looking at different mortgage rates.

    For physician loans with 5-10% down, no PMI, and no early payment penalty, I’m getting 3.65% for 15 year fixed and a 15/1 ARM with 3.65% (term is 30 years). Obviously the ARM has a lower monthly payment, but if I were to pay extra every single month (equivalent to what the 15 year fixed would be), would I come out the same? So lets say its 4K a month over 15 years for the fixed and 2K a month during the 15 year introductory period on the ARM. If I made my payments 4K a month on the ARM for the first 15 years, is that essentially the same as having a 15 year fixed rate mortgage? Would the ARM be paid off in 15 years? My thinking is that the ARM would give us some flexibility in case we had some other expenses we wanted to put the money towards. I guess it comes down to how the armoritization schedule works out for a fixed vs an ARM right? (I realize that there is likely significant interest rate risk with the ARM given the low rates right now…the cap is 5% additional over the 30year term)

     

    Any advice is much appreciated. THANKS!

    #42575 Reply
    The White Coat Investor The White Coat Investor 
    Keymaster
    Status: Physician
    Posts: 4473
    Joined: 05/13/2011

    Yes if the rate is the same. Yes, it’s the same. Yes, it would be paid off in 15 years. Yes, it’s essentially free insurance for a situation where you might need a lower payment.

    Site/Forum Owner, Emergency Physician, Blogger, and author of The White Coat Investor: A Doctor's Guide to Personal Finance and Investing
    Helping Those Who Wear The White Coat Get A "Fair Shake" on Wall Street since 2011

    #42814 Reply
    Avatar StarTrekDoc 
    Participant
    Status: Physician
    Posts: 1964
    Joined: 01/15/2017

    Hi All,

     

    First time home buyer. I’m a fellow starting new job in July. I’ll start by saying I’m a fairly frugal person and would rather rent pretty cheap, but my wife is fed up of renting and I cant convince her otherwise. We are moving back home, know the area very well, and she does have a very good stable job with her company so it makes me feel a little bit better about it. Anyways….

     

    I’d like to purchase a home around 500K. We have been looking at different mortgage rates.

    For physician loans with 5-10% down, no PMI, and no early payment penalty, I’m getting 3.65% for 15 year fixed and a 15/1 ARM with 3.65% (term is 30 years). Obviously the ARM has a lower monthly payment, but if I were to pay extra every single month (equivalent to what the 15 year fixed would be), would I come out the same? So lets say its 4K a month over 15 years for the fixed and 2K a month during the 15 year introductory period on the ARM. If I made my payments 4K a month on the ARM for the first 15 years, is that essentially the same as having a 15 year fixed rate mortgage? Would the ARM be paid off in 15 years? My thinking is that the ARM would give us some flexibility in case we had some other expenses we wanted to put the money towards. I guess it comes down to how the armoritization schedule works out for a fixed vs an ARM right? (I realize that there is likely significant interest rate risk with the ARM given the low rates right now…the cap is 5% additional over the 30year term)

     

    Any advice is much appreciated. THANKS!

    Click to expand…

    Just asking, since you’re starting off and historical rates at lowest — is there a reason not to go 30 year fixed?  I could think of better places to put dollars at the beginning of your career than equity in your home that’s not going anywhere.

    #42821 Reply
    Liked by GXA, Zaphod
    DMFA DMFA 
    Moderator
    Status: Physician
    Posts: 2138
    Joined: 06/24/2016

    …are historical rates at the lowest? Because this time last year, my 15-year fixed was 2.875%.

    "I like money." - Frito Pendejo (Idiocracy)

    [Not a financial professional (yet), lawyer, or employee of The White Coat Investor]

    #42885 Reply
    Avatar StarTrekDoc 
    Participant
    Status: Physician
    Posts: 1964
    Joined: 01/15/2017

    Historical,I mean trend over years.   18 years ago with our starter home 5/1 ARM was 8%.  Yeah, we are looking at the lowest rates historically over time.   I doubt we’d see another sustained period for nearly zero lending rate or PRIME rates sub 4%.   Anything not fixed is going to normalize back up as healthy economy takes further steps to check inflationary pressures.

    #42891 Reply
    Avatar bk121508 
    Participant
    Status: Physician
    Posts: 5
    Joined: 04/05/2017

    Thanks for the replies so far. I remember reading on this site that best thing to do is 15 year fixed and paying less interest over time. I see what you are saying though about potentially putting your money elsewhere and getting a higher return than your mortgage interest rate. What I’m getting right now is 4.125% for 30 year fixed and 3.375% for 15 year fixed. The monthly payment is fine with either. Which would you guys take, and why?

    #42907 Reply
    Avatar StarTrekDoc 
    Participant
    Status: Physician
    Posts: 1964
    Joined: 01/15/2017

    30 yr fixed.  – you’re just beginning –  lower payment rates; able to sock away more $$$ in 529, tax sheltered programs; and rates will in all likelihood rise over the years along with inflation.  That fixed payment in 15 years is going to a lot smaller part of your budget than it is today.   Yes, overall interest is paid higher, but with early career and potential income rampup with a lot of tax sheltering potential;  leverage your equity in your home now.  If you get to FIRE early, you can always additional pay monthly and finish off the mortgage in 15 years — all for a small interest differential that you lock in for a whole 30 years.

    Check out the 30 yr fixed in the 80s.  http://www.freddiemac.com/pmms/pmms30.htm

     

    #42908 Reply

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