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Downsides of an ARM

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  • Downsides of an ARM

    With rising interest rates, I'm getting offers for a 10/6 ARM at about 0.5-0.625% lower than current 30 year fixed rates (physician loans). The current home we're buying is a starter home and we don't expect to be there longer than 10 years. It is on the pricier end, though, because we are in a VHCOL area, so the difference that 0.5-0.625% makes is almost $500/month. Assuming we are going to be moving in <10 years (yes I know things can change), what are the downsides to an ARM? Are there other hidden fees that make it less worth it?

    Edit: for more info, we (dual physician household) expect approx $200-300k bump in income over the next 5 years, and also aim to pay off the mortgage in 15 years if possible. We could afford the max rate increase on the ARM with our current income, and certainly in 10 years if it came to that.
    Last edited by jellowars; 04-24-2022, 09:40 AM.

  • #2
    This choice is between fixed interest rates for 30 years at a modestly higher cost each month, vs lower costs for 10 years followed by a risk that rates will rise.

    In your shoes, I might take the 10 year ARM. It is likely you will move before 10 years from this starter home, and worst case scenario if you end up staying in the house longer term, you could pay down the mortgage early or even pay it off in 10 years.

    One more thing to be aware of with an ARM. The mortgage payment gets recast at each interest rate adjustment. If you have paid sufficient extra principal before the interest rate adjustment, then your monthly payment goes down due to the lower principal balance being reamortized to the original full duration of the loan when the loan gets recast, even if the interest rate goes up.

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    • #3
      We have done the same for our first home where 10/6 ARM was cheaper than 30 year fixed by 0.375%. My goal is to either have the loan paid off in 10 years (about 600k) or refinance if rates become cheaper.
      The biggest risk I can think of in your case is that the borrowed amount seems relatively large (1 million or so based on the numbers you have provided). If rates keep rising for the next 10 years and you are not in a position to pay off the loan/sell the house, you may be stuck with a much bigger monthly payment. After 10 years of making only minimum monthly payments, approximately 80% of the principal would still be remaining. You will lower this risk if you put in more than the minimum monthly payment.

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      • #4
        Originally posted by jellowars View Post
        With rising interest rates, I'm getting offers for a 10/6 ARM at about 0.5-0.625% lower than current 30 year fixed rates (physician loans). The current home we're buying is a starter home and we don't expect to be there longer than 10 years. It is on the pricier end, though, because we are in a VHCOL area, so the difference that 0.5-0.625% makes is almost $500/month. Assuming we are going to be moving in <10 years (yes I know things can change), what are the downsides to an ARM? Are there other hidden fees that make it less worth it?

        Edit: for more info, we (dual physician household) expect approx $200-300k bump in income over the next 5 years, and also aim to pay off the mortgage in 15 years if possible. We could afford the max rate increase on the ARM with our current income, and certainly in 10 years if it came to that.
        great timing of this question for me, reading about it today. I keep on going back and forth between buying house vs not
        Disclosure: no experience with this

        but if I find a house, I will take 10/6 with 0.5% lower rate, either the interest rates will drop in 10 years( refinance) or we will sell. If I get a house, my mortgage will be 500 K in 10 years, some of the principle would be paid off in 10 years.

        question for experts : how much it costs to refinance ?

        OP: what rate are you finding at this time?


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        • #5
          OK, checked after typing previous reply , for me the difference in rate will only make 140-150 dollars/month
          Is it worth 10/6 ARM?

          for OP, I think it makes a real difference

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          • #6
            Originally posted by uksho View Post

            great timing of this question for me, reading about it today. I keep on going back and forth between buying house vs not
            Disclosure: no experience with this

            but if I find a house, I will take 10/6 with 0.5% lower rate, either the interest rates will drop in 10 years( refinance) or we will sell. If I get a house, my mortgage will be 500 K in 10 years, some of the principle would be paid off in 10 years.

            question for experts : how much it costs to refinance ?

            OP: what rate are you finding at this time?

            Currently i'm getting anywhere between 4.25% and 4.7% on 30 year fixed physician loans

            Comment

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