Please I need help from bright minds re: adjustable vs. 30-year fixed mortgage?

[thereismore]

My mortgage is now resetting from a 5.375% to adjustable. Since the rates are low, I don't think it is immediately a bad thing. Should I go along and let my mortgage be adjustable, or should I make the effort to make it into a 30-year fixed, which would, at least initially, carry a bigger APR than adjustable?

If the fed starts to print money and we go into more inflation, is it better to have adjustable or fixed mortgage?

Please help, I am not very economically savvy. Thanks be to all.

[TXDemGal]

1. If you can swing it financially

you should make it a 15-year fixed. Just one gal's $.02.

[boozepusher]

2. I don't like to take chances with my house

30-year fixed is the only way for me. Of course I know next to nothing about real estate.:)

Edit-- A 15-year fixed is a better idea.

[Grey]

10. We went with the 30 year fixed,

and on the anniversary, each year we put down what we had saved that year, onto the principle.
The thinking was that in hard times we would be able to swing the lower payment. Good years we
could buy down more of the principle. We saved a huge amount on the interest and paid off the
house way ahead of time. You also save on interest if you pay bi-monthly.
I don't know if your bank will let you do this but you could ask?

[groovedaddy]

3. I used to be in the business, so, for what it's worth

I generally never recommended arms. The devil is in the details. Is the potential rate capped?
What is the arm pegged to? (i.e. Prime / LIBOR, etc.)
The old rule of thumb used to be: if you can lower your rate 2-3%, DO IT, as it should save you substantial bucks.
The only time ARMs can be advantageous - during a time of high interest rates (i.e. late 70s, early 80s)-OR- if you plan on selling the house in a few years and you have a reasonable expectation that rates aren't going to jump substantially.

[Skink]

4. Rates have no place to go but up.

[Ezlivin]

5. Second vote for a 15-year fixed mortgage

We purchased our house with a 30-year mortgage and as soon as the interest rates bottomed out we refinanced to a 15-year mortgage.

It saves thousands of dollars to go from a 30 to a 15-year mortgage. And you'll be surprised at how fast those 15 years will go by.

[CreekDog]

26. no way on the 15 year, the interest rate difference is not worth the risk

I looked at this. I could refinance at 30 yrs at 5.64 for a payment of about 1800/month or 15 years at 5.36. I'm in the 25% tax bracket so the 0.28% difference after taxes becomes 0.21% but at what risk to save that money?

30 year fixed payment/month = 1810
15 year fixed payment/month = 2589

Now if you lose your job or you lose some income, which payment is less likely to leave you homeless? Obviously the lower payment is easier to handle.

Now if you have the money and income, simply take out the 30 year mortgage but pay the loan as if it were the 15 year payment (at the lower rate). Guess what, you pay off the mortgage in less than 15 years!

The interest difference becomes almost negligible and gives you a way to reduce your payment in the event of a substantial loss of income.

[Ezlivin]

29. Good point

It's ironic that you point out it's safer to take out a 30-year loan and pay it off as if it were a 15-year loan.

I took out a 15-year loan and I'm paying it back as if it were a 10-year loan!

I agree: You do need to budget in case of emergencies.

I can't wait to burn my mortgage!

[CreekDog]

31. safest approach in recessionville is longest term at predictable rate, paid off in shortest time

that's the take home message.

that assumes interest rates between the terms are not all that different.

my auto loan is a 6 year loan, only $229/month at 5.64%. shorter loans didn't give me a better interest rate so i took the longer loan, but i pay it off at a faster rate, but i have that monthly minimum very low in case cashflow becomes a problem.

[BR_Parkway]

6. depends on how often it can reset, what the maximum increase can be each time and

how long you'll stay in the house. If short term, then probably better to save the refinance money and keep what you have until you sell it. But if you'll be there longer term, then you need to figure out the payment difference and compare it to the cost of refinancing the note - at some point it will make more sense to pay the cost to refinance.

[yodoobo]

7. The fed IS printing money now. Inflation is on the horizon

Look at this way, lower interest rates hasn't worked in 8 years. We're getting close to zero rate from the fed now.

Eventually, they are going to switch gears and start raising rates, cause lowering ain't helping.

Lock it in if you can.

[burythehatchet]

8. If you pln to stay in that house, then go with a fixed rate. If you plan on moving within

five years then ARM is OK though still more risky.

[pnwmom]

15. This used to be reasonable advice, but now that the job situation is so precarious,

I don't think this is a good idea. Suppose the person lost his or her job AND had his mortgage payment go up because of an ARM mortgage? This is already happening to many people.

[dmosh42]

9. For any long term, definitely go with fixed.....

You correctly have figured that the gov't favors an inflationary cycle, so this huge debt can be payed down. Don't be one of those who start with a 4% (whatever it is ), and be caught five years later with an 8%. It is possible, if you have lived through the Vietnam era, you would know. Also, make sure the mortgage is open-ended, meaning no penalties for paying off early or at any time.

[dmallind]

11. Frequent mover and numbers geek says fixed here too

While it's possible you could see a slight reduction in ratyes from the 5.375 or so you can ghet now for fixed with good credit, the chance of higher rates is WAY bigger and with WAY more room to move. Caould you kick yourself in three months if the Fed panics and ARMs go down to 4.875 maybe? Sure - but that's about a floor and an unlikely one at that. Much more likely that as cashflow for these companies tightens over time and risks remain large and uncertain that rates go up - and they could easily go up a lot more than they could go down.

Arms are for times of HIGH interest rates and likely falls in the future. That ain't now. Even if we have a fall it will be a small one and of limited duration. We also have very low interest rates from the veuiewpoint of recent history, so much better to take advantage of them I would think.

Of course you have to check closiung costs and so on as well as the details of your own ARM (capped? Max annual moves? Frequency of moves?) to get a real answer, but philosophically right now fixed is the place to be.

My own mortgage FWIW is a fixed 5.25 available during a brief dip early this year. The company paid a point to get that rate - I think 0pt rate was 5.5. It was between 6 and 7 just a few weeks ago.

[Donnachaidh]

12. Go for a 30-year fixed with no pre-payment fee

And then make 13 monthly payments per year. You'll pay down like a 15, and not have to worry about adjustments. Just split one monthly payment into 12 pieces, and add that 1/12th to each monthly payment.

[dysfunctional press]

13. we opted for the 15-year fixed. that's what i'd reccomend.

and if you can make a half-payment every two weeks, instead of a full one every month, it'll shave a few years off of the 15.

[pnwmom]

14. 30 yr. fixed. Then, if you have the ability, you can pay a little extra whenever

you want, specifying that the extra funds should be applied to reducing the capital only -- which would effectively shorten the term of the loan without boxing you into the higher payments of a 15 year term.

Also, avoid a "pre-payment penalty" if you can.

[Vinca]

16. It depends on your future plans. If you're thinking you might

sell in a couple of years, you might be better off keeping the adjustable mortgage since adjustable rate mortgages tend to be more affordable than fixed rate mortgages. If you're in it for the long haul, shop around for the lowest fixed rate you can find from a reputable source. Also keep in mind that the condition of your property plays a part in this. If it is unfinished or in below average condition, many lenders will only offer you an adjustable mortgage.

[Warpy]

17. If you can afford a fixed rate, get it

because I don't honestly see mortgage rates going anywhere but up over the next few years as banks scramble for assets.

The fixed rate can give you the real benefit of owning versus renting, a hedge against rising rent.

The best bet of all is to see if you can possibly swing a 15 year fixed mortgage. Those carry a low APR and are paid off in half the time, a real benefit.

All of this assumes you have a good income in a recession resistant field.

[s-cubed]

18. I've always gone with fixed.

First, whatever you have, be sure there is no prepayment penalty. If you can swing a 15 year, I prefer it. Certainly if you don't expect to be there very long, it may not matter. But I sleep better knowing that the rate can't go up, even if my payments go up through taxes.

Last time I refinanced, the difference between 15 and 30 year rates made it attractive. I did pay a bit more upfront.

However, note that if you have the discipline, you can always prepay some of the principal each month on a 30 year, if you aren't sure you can swing it every month. The difference you'll see in your equity at 10 years really shows you the advantage of 15 years or regularly prepaying some of the principal.

good luck

[MindPilot]

19. get a fixed

If you can swing it, a 15, but a 30 is cool. You can always pay more on the principal or refi later. But getting out from under an ARM should IMHO be a top priority of getting ahead of the economic curve.

[Corgigal]

20. get the fixed so you know where you are every month

but I pay bi-weekly and Di-Tech takes out an extra 100 a month so I can pay off my 30 year mortgage in 21 years. You can drop out of this program at anytime if you need those extra funds. I have about the same interest rate.

[MindPilot]

21. Or more accurately where you are going to be in a few years.

Curious note about paying extra on the mortgage. I found a little item in Consumer Reports that said instead of putting that extra on the mortgage, you would see greater returns over the long haul if you put that money into your IRA or 401(k). One reason is that it is tax-deferred if you put it in an IRA and the other is that over the same time period, the IRA is likely to increase in value more than your house.

[CreekDog]

30. i calcutated that very thing too

401k uses pre tax money, principal payments use after tax money. thus, in the short term, to come out ahead you need to save enough to offset the income taxes you paid on after tax income (you won't be able to save that by paying principle).

you probably can't save it in the long term either because the money to your 401k can earn interest or income for years before you will be taxed on it.


thus, if you are in the 25% bracket, $75 in extra principle costs you $100 (you have to earn $100 - $25 withheld for taxes). Versus $100 straight to your 401k. That's a 25 percent difference right there in the short term.

Additionally the money you are able to put into your 401k can earn interest or growth for a longer period instead of not realizing the savings until your mortgage is paid off and THEN saving that money when your time horizon to retirement will be much shorter.

That said, the risk in the 401k is that it may not grow, it may fall, but the tax savings is significant. Furthermore, you won't need risky investments to beat the effective costs of a 5.75% mortgage (costing with tax deductions about 4.31%). In other words to beat the savings in mortgages, you simply have to earn better than 4.31% and that's the worst case scenario (it assumes you can't invest with pre tax money which people with 401k's can do).

[mikeytherat]

22. With rates where they are now, I'd definitely go for 15-year fixed.

mikey_the_rat

[CreekDog]

23. Fixed Rate for 30 years for a few key reasons:

1) lowest payment needed to keep mortgage current is advisable during recessions that could put you out of work
2) difference between 30 year rates versus 15 year rates need to be considered taking into account tax deductability of interest. if the difference is 0.50% but you are in the 25% bracket the effective difference is only 0.375%. most of the savings is not due to the lower interest rate but the shorter term...and you can shorten the term by paying additional principal on your own.
3) reduce your chance of mortgage payments you cannot afford (from interest rate changes and/or job loss). 30 year is a better bet because it's a lower minimum payment.
4) lower payment through an ARM doesn't negate the risks, plus in this economy, the short term rates which determine ARMs are probably not much different than long term fixed rates (or certainly not much better). additionally a lower ARM rate needs to consider tax deductability of interest.
5) longer term fixed rate that you can most easily afford is the wisest choice because in this real estate market you should select a loan that you will not need to refinance (because you may not be able to).

[deaniac21]

24. It depends on how long you plan to stay in the house and

your credit rating.

[SoCalDem]

25. FIXED..(if you like the house & plan to stay)

real estate goes two ways..high interest/low price or low interest/high price..

If your home is place to LIVE IN, and not for "investment" purposes, the objective should be stability of payments you can afford, and paying it off ASAP, so you don't end up 65, marginally-employed, and with a big mortgage payment that SS won't cover:(

If you commit to a 15 yr (higher payments), it will COST you to later go to a 30, by refinancing (if you even can)..and if you lose a job in the interim, those extra hundreds of dollars a month can be brutal....go for 30..and pay extra whenever you can ..with a 30, it's up to YOU to decide ..

[RB TexLa]

27. All depends on how long you plan to live in the house, what you want to do with your money

Lot's of times it comes down to the old saying "cash is king."

Talk with a loan broker. Easiest way is just ask for one at your bank if you don't know one, the loan officer at a retail banking location is used to answering questions without an imminent sale.

[CreekDog]

28. I would argue against the "how long you plan to stay" approach

plans change. you may take out an ARM planning to leave in 5 years, but say you can't sell, say rents have gone up and you can't move and can't buy elsewhere?

you need to look at the different interest rates and see what those differences amount to. if the difference between a 5 year fixed/25 yr ARM is .375 there is not much upside to taking on that risk.

what if you don't move or can't move? well, then your loan resets.

Consumer Reports reported some years ago that most adjustables would consume most of their savings within 18 months of the first reset.

Think about that.

It would be one thing if short term rates were 3 percent below the fixed, but when they are .5% or less difference, it's not even worth troubling yourself.

[JerseygirlCT]

32. In this day... I know I'd want a fixed rate

That's just me; I'm no financial genius, and I tend toward the very conservative as far as my own finances.

But I'd sure hate to find myself on the receiving end of a suddenly increased rate...