Thread by @roncaruthers

1. Mortgage Talk Time!

OK, so this showed up in my DM's. Let me tell you what I told him.

'Read your mortgage thread.

Young 30s couple expecting kids over next couple years.

Like living in city for next 5+ years but may change with kids over time.

2.

Buying house in a fast developing area.

$1MM purchase price.

Thoughts between a 10yr ARM at 1.675 and 30yr fixed at 2.125'

The only change I made was I pulled the city he was living in, so y'all don't buy his house out from under him or something.

3. Anyway, what do YOU think?

Go for the ARM with the lower interest rate?

Or the 30 year fixed?

While you think about what YOU would do, let's do some math.

4. First off, do you know what an ARM is?

It stand for Adjustable Rate Mortgage.

A 10 year ARM means that he has that rate for 10 years, but then it goes to whatever the market is.

Which likely will be higher than what it is now, because you can't go much lower than 1.675%

5. So, here is the math on this:

First, let's assume he's going to finance the entire 1 million, just so we have a number to work with.

With the ARM, his principal and interest payments will be $3,536 a month forthe first 10 years.

With the 30 year fixed, it will be $3,759.

6. So the difference is $223 a month.

Which, over 10 years is $26,762, so not an insignificant amount.

AND, he says he'll likely be there a few years...in which case, you might think the ARM is the better choice.

However, I'D say to take the 30 year fixed.

Here's why:

7. First off, 2.125% is still STUPID low.

In the 1970's, mortgage rates were about 7.5%, and by 81, the average mortgage rate was 9.5%.

So, the real question is: Where will mortgage rates be in 10 years when the ARM adjusts?

The answer is, likely higher than 1.675% OR 2.215%.

8. Most ARM's adjust to some version of 1 year treasury rate plus 2-3%.

Those rates have been low for the last 20 years, but in the past have gone as high as 9.5%!

So, his new interest rate could go to 5-10%, which means his payments would jump accordingly as well.

9. At 7.5%, the payment in 10 years would be $6,992 (!!!)

So, if he changes his mind, and wants to stay, yes, he'll be making more in 10 years because of inflation, but how quickly will he pay back the couple hundred he saved each month and then some?

10. Also, you might think 'well, he can just refinance then', which he may very well do....but what if he just lost his job?

Or regular interest rates are back to normal?

He still loses in those scenarios.

10. Also, maybe he wants to move to another place, but keep this place and rent it out....or even sell it with owner financing?

Having a fixed rate for 30 years on a million-ish dollars at 2.215% is an ASSET that gives him a ton of long term options that the 10 year ARM does not

11. So, that is what I would do if I was him.

What about you?

/end