We’re closing escrow in 10 days and I’ve rate locked a 7/6 ARM @ 6%. Right now a 30 year fixed is 6.5% from the same lender. In either scenario, I’ll get an additional 50 BPS relationship discount, so the final rate will be 5.5% on the ARM or 6% on the fixed.
Without revealing the exact loan amount, it’s a jumbo north of 1M.
What would you do? In almost any other historical period, I’d say that 7 years would present a low risk that I’ll be able to refi sub 6%, but I have serious concerns that we might be entering a hyper-inflation period. That said, there are so many unknowns because the Fed was pressured strongly last time Trump was president to cut prime rates, and this was before COVID.
Is 50 BPS discount worth the risk that I won’t be able to refi within 7 years? Rough math is I’ll be paying down an additional 12k per year towards my principal at the lower rate.
I’d take the ARM, personally, and have done so in the past. I also pay mine like a 15 year, so by the time it amortizes, I’ll be golden. You’ll probably save ~$35k in interest in the next 7 years alone. Then again, I took that deal when the ARM was at 2.125% and the fixed was at 3.375%, so savings was a lot higher.
If you’re convinced we’re going to see a ton of inflation and you’re not ready/able to pay to outrun the amortization on it, the fixed is probably a better bet.
Hollis said: @Lennon
Thank you. But also, if I had a 2.125% rate, and HYSAs were yielding 5%, I wouldn’t pay back a single dollar over my minimum
I left that part out for the sake of brevity. Once HYSA minus my tax rate exceeded the interest I was paying, I did exactly that. Right now I have about 130% of my remaining balance in a tax-free municipal money market account paying 3.51%.
Who says you’ll even be in the house 7 years from now? If you are, and if you still haven’t refinanced within the first 5 years, then that’s when you start making ‘official’ decisions as you have 2 full years to figure things out if you haven’t.
@Sky
Origination Charges $3,436
0.125% of Loan Amount (Points) $1,816
Processing $1,542
Tax Service $78
B. Services You Cannot Shop For $1,256
Appraisal $1,160
Credit Report $96
C. Services You Can Shop For $9,154
Title-All Endorsements $200
Title-Closing/Escrow $4,500
Title-Courier $200
Title-Lender’s Policy $3,614
Title-Loan Tie In $350
Title-Mobile Notary $250
Title-Wire Transfer $40
D. TOTAL LOAN COSTS (A + B + C) $13,846
@Hollis
If that’s all it is, doesn’t seem bad, but I’d lock it in to have them disclose all fees. It all comes down to the actual math, how the numbers work out where the break-even is and then what is important to you financially. Sometimes the numbers that make sense for you and your situation don’t make sense to someone else, and there’s even something as different as personal preference to less stress and not thinking about mortgages for the next 7 years.
Sky said:
What’s the cost on these arms?! I haven’t seen an arm have good pricing in a couple of years. A 2/1 buy-down yes, but ARMs…
The lender I work at has good jumbo ARM pricing for bank deposit customers. Similar to these rates. Of course, they are put on the portfolio, so we can have different pricing than the secondary market has for agency ARMs.
Only you know your finances and risk tolerance. If this is a huge amount of money compared to your total wealth and income, then don’t take risks with it. If you’re a high earner with other assets, you can afford to take a risk. If hyperinflation is your only concern, this debt will be, by definition, cheaper to pay off in the future when rates adjust, so that’s a win.
@Remy
And that’s what I tell myself, that in the event of hyperinflation, the gains in the value of the house and wage increases would offset.
I’m keeping nearly 3 years PITI in reserve, so it’s not like I’m stretching crazy thin.
