4.625% Fixed 30 or 3.25% Var

[Brandon Hall]

I'm working with two banks right now to try and finance a four-plex.  Both are 20% down and amortized on a 30 year schedule. One is a fixed 30 year mortgage at 4.625% and the other is variable at 3.25% for the first 5 years.  After that it can only go up or down by 2% every five years maxing out at 11.25% in 20 years worst case scenario.  We are purchasing for 43k and I'd like to see it paid off within the first 5 years.  We are talking $28 a month difference and over 5 years thats $1680.  What are the pros and cons of either and which should I go with?

[Mark Ferguson]

That is a big rate difference, even though the monthly amount is not much. If you have the reserves to handle a higher payment in case you don't pay it off I would go with the ARM if it were me. Even though the ARM can adjust at 5 years, the savings in the first five years means you won't actually pay more total interest until around years 7-8. Plus money is worth more now than in the future thanks to inflation.