30-year fixed or 5-year ARM?

Question

If my expectation of the interest rate is that it will be lower than what it is now by 2027-2028?

Should I take advantage of the lower 5-year ARM rate now and hope to receive an even lower rate 5 years later?

Or take a 30-year and refinance 5 years later?

I understand for either scenario to work, my assumption of the interest rate has to be correct.

Bob Okenwa · Answer

ARMs are a gamble. Take the 30-year and if there is an opportunity to refi down the line, than that is a bonus. I run my numbers strictly based on current rates and prices and not hypotheticals of lower rates or prices in the future.

Ben Zimmerman · Answer

I guess I'm the outlier, because I'm currently buying with ARMS.

I don't know of anyone who thinks that rates will be higher in 5 years than they already are (of course anything is technically possible).With ARMS being usually the lowest interest rate loans you can find it can save you a lot of money up front.  A hypothetical 400k home with 20% down is going to cost you $200 per month more at 6% interest as opposed to 5% interest.  So right off the bat if it's a 5/1 ARM I get to save 12k in interest payments during those first 5 years.  If rates remain flat, or drop I win big.  The only way to lose is if rates increase high enough that my 12k head start doesn't offset the additional cost due to a higher interest rate during the refi.Additionally as rates begin to drop anyone that is buying today will be rushing to refinance which will cost them an additional few thousand dollars in closing.  This puts me even further ahead since I am in no particular hurry to refinance since my rates are dropping automatically and don't necessarily need to refinance right away.  I have the luxury of waiting to see if rates continue to drop even further before deciding to eventually lock in a fixed rate loan.  If I use the 200/mo savings from a lower interest rate of the ARM, and apply that to the mortgage balance each month, then after 5 years I'm nearly 18k ahead of the fixed rate loan when it comes to paying down the mortgage.  So even if rates do tick up slightly at the end of 5 years, I'm currently far enough ahead in the repayment schedule that it likely won't matter.  Because of my initial head start, it would take me paying 6.75% interest for the remaining 25 years for me to eventually break back even with the guy who started with the fixed 6%.  There is still obviously risk involved.  In theory the world could be in complete chaos at the end of year 5 and cause all kinds of problems.  But I am willing to take calculated risks.  Sometimes I win, sometimes I lose, but I am confident that over an investing lifetime that the law of averages will play out.

Jaron Walling · Answer

We're about to cash-out refinance a property and choose a 30yr fixed rate. We like the safety and security of this loan and the ability to refinance into a 4-5% rate if that opportunity presents it's self. No way it goes lower for investment property. This is a BRRRR-ish property that cash-flows at current rates. Feds control rates so we don't bank on it.

Robin Simon · Answer

I would be shocked if there wasn't at least a period of significantly lower rates than today over the next five year period personally

Nour Bitar · Answer

What's the difference in percentage you're getting between 5 ARM vs 30 year fixed? Points vs no points? I would say if you have more than 1% interest rate savings then it may be worth it

Also, will you be adding value to the property and will refinance later anyway?

Nathan Harden · Answer

30 year fixed then negotiate the seller to pay for your 2/1 rate buydown. Then find a lender that offers free refinances.

Andrew L. · Answer

Primary residence. However, I will be house hacking while living there and turn it into a rental property after 2 years of residency.

Have not been shopping for rates. Just a hypothetical question.

Chris Seveney · Answer

@Peter Chan

What type of property is it ? Investment or primary residence?

What are the different terms you are getting?

I just looked at my credit union and their ARM’s have changed from 3,5,7/1 arms to 6 month adjustments on the adjustable rate - wow

30-year fixed or 5-year ARM?

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