What does conventional wisdom say for when to get a 30 yr fixed vs 5ARM, 7ARM loan, etc.?

Submitted by GiantsFan2010 t3_126967p in personalfinance

I'm looking to buy a home soon, but I'm not sure if it's a better choice to get a 30 yr fixed or 5ARM, or 7ARM loan. The 30 yr fixed is ~6%, 7yr ARM ~5.5%, 5yr ARM 5.35%. One person I work with just got a 7 ARM loan, so I'm assuming they think interest rates will go down in 7 years? Also, if say I get a 30 yr fixed at 6%, can't I just refinance it into a lower interest rate loan if rates go down? And same with a 7ARM or 5ARM?

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BastidChimp t1_je8tun3 wrote

Just stay with the 30 year fixed rate loan. It will be less stressful in the long run.

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mytrickytrick t1_je87qyv wrote

I don't know anything about ARM aside from RISC :) but for refinancing a fixed rate mortgage, yes, you generally can. However, there are fees with that, so you'd have to factor those fees in to see when your break even point would be. Different lenders have different fees, so check and ask around.

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avalpert t1_je8dhh6 wrote

Because conventional wisdom doesn't always align with pure rational financial decision making.

Interest rates move up and down - in general, short term rates are lower than long term rates so in general you will pay less over the term of a loan if your rate is tied to shorter rather than longer rates. That said, they are volatile like stock returns, so you are taking on some risk to expose yourself to that volatility. If you can withstand that volatility you are generally better off with the ARM.

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mylarky t1_je8e8be wrote

I got a 7:1 arm in December 2021 on a construction loan. It would convert to a 30 year with the 7:1 rate of 3.5.

Hit the jackpot, as when I finished building the house and converted to the 30 year loan, rates were screaming at 6.5.

I've got 7 years to refi. If they hit 4.5%<, I'll refi in a heart beat.

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Droo99 t1_je8tild wrote

I would take the fixed given those three choices. And I have a 7 year arm now so I'm not averse to them... the rate discount just doesn't seem worth it.

Sometimes a 15 year fixed is a good deal if you can swing the payments. No idea where they are nowadays though.

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Unfair_Isopod534 t1_je9c5am wrote

Funny that you asked. I just got 30 fixed. My parents told me me that in 2013 they got ARM at 3%. Thankfully they were able to payoff the house before it. Out of curiosity i looked up the difference between 3% and 6% on my mortgage. It's over $1000. Whether you are comfortable with huge rise in monthly payment, it's up to you. Obviously after some years you would have paid of some of the loan so the jump wouldn't be as drastic. What was much more interesting is searching ARM on r/personalfinance. 2-3 year ago, we got lots of comments how the rates will never go up.

I don't know what the common wisdom is. I know that if i were to go with ARM, I would run some more math. Personally, i don't believe when people say "you can always refinance". I was told that by many. What i do wonder is what can I refinance to? When will i look to refinance? Will i look to refinance when rates are going up? Will i look to refinance when the market is in a "gully"?

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lucky_ducker t1_jeaxr1k wrote

&gt; can't I just refinance

Don't ever count on refinancing. Something could happen to your earning potential (like a long term disability) that makes it impossible.

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