Anyone used or thought about an ARM loan?

[OILFIELDTRASH]

Penfed has an arm 5/5 2.5% they pay first payment and closing costs. I'm thinking I could aggressively pay down my loan over the next 5 years and refinance or sell before the 5 years is up. Could save thousands in interest and meanwhile I'd be paying down the principal like a madman. I'm not seeing the downsides to an arm at this point for me.

 

[Blackjack200]

I would have used that loan myself if they let me, but it has to be owner occupied and I was buying an investment.

Go for it, it's a great deal.

 

[jaedaliu]

You're right, no downside if you're going to cut the principal down quickly.

Well, i guess you might miss out on itemized deductions.

 

[coaster831]

I think it's a good product - especially since, even if you don't pay it down in the first 5 years, years 6-10 will be capped at 4.5%, which is still not a bad rate. (The rate can only move 2% for each adjustment.) So, if you plan to pay it off or move within 10 years, it's definitely a preferable choice over 15- or 30-year products.

 

[IronWing]

Wells Fargo is advertizing a 2.875% 15 year fixed rate. Run the numbers for different loans and see if the interest savings are worth the risk of future higher rates. There are some great Excel templates available for crunching mortgage scenarios. If the closing costs really are zero and not just rolled into the loan then the deal sounds hard to beat.

 

[Apathetic]

As IronWing stated, make absolutely sure the closing costs are truely zero and not simply rolled into the loan (which is common).

When dealing with ARM loans, you need to find out how much the interest rate can adjust by each period, how many periods are there in a year, and what is the lifetime cap on the interest rate.

Dave

 

[dullard]

I did an ARM and made out like a bandit. The ARM saved me many thousands. I nearly paid off my first house with that ARM in 5 years due to the savings and due to being stingy. Then I sold it just before the rates reset (although in my case rates would have gone down slightly).

But loans like that do get people into trouble. Maybe you can't sell later, maybe you didn't roll the savings into useful ends, maybe you don't want to pay off the loan (i.e. get a long term low interest loan, and invest the money and skim off the profits). Be sure to think of all options. A 15 year fixed is just about as good now as a 5 year ARM.

 

[jupiter57]

But loans like that do get people into trouble.

Yes they do.

Not a bad deal if you can really manage your money. But sadly, most can't.

Had some family that found a good deal on a place just over 5 years ago, $140K, they were able to swing a $240K ARM loan, (still below appraised value & a small down payment) saying they could pay it off in 5-10 years when the market rebounded(?).
No sooner than they got the house, the credit card offers started pouring in, well, guess what they did? Yep, maxed them out. Living like royalty!
Then, 5 years later, they couldn't make even the small monthly payments, much less the "balloon" payment. (IIRC, ~$75K)
Foreclosure time!

 

[Pr0d1gy]

Honestly, this is a horrible time to take out an ARM. With the recent government looting of the Cyprus citizens' bank accounts the markets are in a state of flux and there are real fears the FED is going to do the same thing here eventually. If they did do that and you're on an ARM you would absolutely get effed in a major way. ARM's are very risky when the markets are sketchy and they've rarely ever been more sketchy than now.

http://www.foxnews.com/world/2013/0...gives-cyprus-4-days-to-find-bailout-solution/

Basically, the banks were supposed to steal or *tax* every bank account like 10% and give the money to the FED/Central Bank/IMF/etc in order to avoid bankruptcy. They recently decided not to do it, but you see here they're getting massive pressure to do it anyways. The speculation is that Italy might be next after they finish with Cyprus.

 

[Blackjack200]

So the OP shouldn't do an ARM because Cyprus.

 

[jaedaliu]

Honestly, this is a horrible time to take out an ARM. With the recent government looting of the Cyprus citizens' bank accounts the markets are in a state of flux and there are real fears the FED is going to do the same thing here eventually. If they did do that and you're on an ARM you would absolutely get effed in a major way. ARM's are very risky when the markets are sketchy and they've rarely ever been more sketchy than now.

http://www.foxnews.com/world/2013/0...gives-cyprus-4-days-to-find-bailout-solution/

Basically, the banks were supposed to steal or *tax* every bank account like 10% and give the money to the FED/Central Bank/IMF/etc in order to avoid bankruptcy. They recently decided not to do it, but you see here they're getting massive pressure to do it anyways. The speculation is that Italy might be next after they finish with Cyprus.

I don't get it. what does that have to do with the OP getting a low rate right now and paying off almost all of it before the rate can change?

 

[Phoenix86]

I don't get it. what does that have to do with the OP getting a low rate right now and paying off almost all of it before the rate can change?

This.

ARMs in low interest periods are generally a bad idea but not specifically depending on the case. If the OP can afford it, he's probably fine. It's probably even worth the risk for 3-4 years if something crops up and he has to refinance the remainder. It all just depends on how much he's saving on the closing costs vs. a traditional low interest mortgage. Then weigh risk vs. benefits.

 

[Pr0d1gy]

I don't get it. what does that have to do with the OP getting a low rate right now and paying off almost all of it before the rate can change?

I would prefer a much more stable global market if I were looking at an ARM. That is all. I'm just giving this guy the info.

 

[steppinthrax]

The reason why ARMs have such a bad name is because in the past those who wouldn't normally qualify for a conventional loan (due to the higher monthly payment) only could qualify for an ARM. Those that took that route thought they could somehow increase their income or refi within that point. Hence all of the massive foreclosures.