5 year ARM 5.86% from a 30Year fixed 7%... Bad or Good?

Question

We purchased our home 1/08 for 209,900. we put down $6,000 with a down payment assistance program through FHA and Wells Fargo. We then put an additional $6,000 down ourselves.

Total payoff on home is 197,900. Mortgage is a FHA 30Year Fixed at 7%. We are refinancing the house after 6months to lower our payment. We only plan to stay in this house for another year due to starting a family and wanting to be closer to our own families.

Our lender rep , who is also a family member, suggested a 5 year ARM at 5.86% which will lower our payment close to $100 a month. He said the rate will not increase more then 1% for 6 years which at that point we will have sold the house and moved on. He doesn't suspect the recent interests rates to lower due to the market within our 1 year left at the home. we have put in about $10,000 in upgrades and plan for another 10,000 in the next year. We suspect we have 10,000 in equity according to zillow.com.

Is this a good deal? Help anyone?

Answer 1

I am not a real estate professional but to me that seems like a good idea to get a ARM.  If you are completely positive that you will not be living there past 5 years, then why would you get a 30 year loan?  If you sell the home in 3 years, which sounds better?  Paying 5.86% or 7%?

Answer 2

Whether it's a good deal or not depends on how much the loan is going to cost you (points). If this is a no-cost loan (no out-of-pocket costs and 0 points), then you are the ideal candidate for a 5-year ARM, because you plan on selling before the rate adjusts.

However, if you're paying even 1/2 of a point in loan origination fees, then you're breaking even. Any more than that and you're losing money. 1/2 point on $200K is $1000 that you have to pay in order to save $1200 ($100 a month for a year) and that's pretty much a wash. If you have to pay 1 point ($2000), you're actually losing money.

Answer 3

Flip a coin.

  The best loan in the world is a 15 year fixed.  Next is a 7 year balloon (if you are brave).  Next is 30 year fixed.  All the rest are variations of junk.  Fees on that 5 year ARM he's selling you will be higher than on the fixed rate.