30 YR Conventional Physician vs 10 year ARM

[char]

I'm trying to figure out the downside to using a 10 year ARM vs a 30 year conventional for a $390,000 mortgage. Neither will require PMI despite not putting down 20%.

10 Year ARM - 2.375%, periodic reset every 6 months, max interest rate 7.375%, minimum 3%, margin 3%, prepaids $5639.

30 year conventional - 3.0%, prepaids $5813, $230 in points.

We are probably in this house for 5-7 years max as this is something of a starter home. Renting a similar home would cost 1.5x or more of what our escrow payment will be. Comparing against the 30 year I seem to be ~$15,500 ahead using the ARM if I assume I sell before the 10 year mark.

Anyone have good reading on this topic?

[TheTodd]

I'm trying to figure out the downside to using a 10 year ARM vs a 30 year conventional for a $390,000 mortgage. Neither will require PMI despite not putting down 20%.

10 Year ARM - 2.375%, periodic reset every 6 months, max interest rate 7.375%, minimum 3%, margin 3%, prepaids $5639.

30 year conventional - 3.0%, prepaids $5813, $230 in points.

We are probably in this house for 5-7 years max as this is something of a starter home. Renting a similar home would cost 1.5x or more of what our escrow payment will be. Comparing against the 30 year I seem to be ~$15,500 ahead using the ARM if I assume I sell before the 10 year mark.

Anyone have good reading on this topic?

You know the downsides, that if you stay in the house for longer then 10 years interest rates could rise and your payments could go up; Refinancing at that time may be a poor option because of a higher rate climate. That being said, 10 years is a long time for a fixed rate in an ARM, and it is a large rate differential, so I would definitely consider it.

When I was looking this month for my house, I could get 2.875 for fixed and 2.5 for 5 year ARM, so it was not worth it for me (I also plan on staying in this home for a long time). In your case with a bigger delta and longer fixed period it may make sense. If you are in a situation where with your anticipated income you could pay off the mortgage if rates rise significantly by 10 years and you happen not to have moved, that would be another reason to favor the ARM.

[Brains428]

Is saving 15k over 10 years worth the risk of an adjustable mortgage?

Life happens. Fixed rate over 30 years is the safe bet.

[MSooner]

Any chance you will want to keep it as an investment when you move on?

[char]

Any chance you will want to keep it as an investment when you move on?

There is a small chance, although we have avoided becoming landlords in the past.

[char]

You know the downsides, that if you stay in the house for longer then 10 years interest rates could rise and your payments could go up; Refinancing at that time may be a poor option because of a higher rate climate. That being said, 10 years is a long time for a fixed rate in an ARM, and it is a large rate differential, so I would definitely consider it.

When I was looking this month for my house, I could get 2.875 for fixed and 2.5 for 5 year ARM, so it was not worth it for me (I also plan on staying in this home for a long time). In your case with a bigger delta and longer fixed period it may make sense. If you are in a situation where with your anticipated income you could pay off the mortgage if rates rise significantly by 10 years and you happen not to have moved, that would be another reason to favor the ARM.

The difference between the two rates is what caught our attention. We could probably pay off the house or absorb the rate increase.