5/1 ARM vs a fixed rate loan

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5/1 ARM vs a fixed rate loan

Brian Jackson
Member since 2023 · 4 posts · 4 votes

I spoke with an accountant who recommended I compare a 5/1 ARM vs a fixed rate loan in a spreadsheet. They said many times the ARM is the better option since less money goes to interest and you get lower payments which allow you to make additional payments to pay down the principal. I did a calc on today's real numbers (6.6 fixed vs 6.1 ARM) on a 1M loan and I save about $25,091 in interest (more equity) and pay about $19,620 less mortgage payments (opportunity to pay down the principal) at the end of the first 5 years. The lower monthly payment ($6059 for ARM vs $6386 for fixed) could go to principal. But you have to subtract out the cost of a possible refi if rates rise and you need to get out of the loan.

The accountant says this would let me build up equity faster. After 5 years if rates go down you are golden but if rates go up you might get stuck refinancing into another 5/1 ARM or fixed loan with a high interest rate.

On large loans like this 1M example, is a 5/1 ARM better than a fixed rate loan?

Why not refinance 5/1 ARM loans every 5 years rather than getting a fixed rate loan initially?

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Scott E.
Contractor · Scottsdale, AZ · Member since 2010 · 2k+ posts · 3k+ votes
3y

If you plan to hold onto the property forever, consider going for a 30 year fixed loan and then buying down the interest rate with "discount points."

In this market, you might even get the seller to pay for some or all of those discount points.

I don't think your accountant is steering you wrong. And your math is all very well thought out. But I'm just a huge fan of fixed rate loans when you have a choice. I was a mortgage loan officer in 2007 and I was processing modifications, short sales, and foreclosures in 2011. I saw way too many people negatively impacted by adjustable rate loans.

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  • Scott E.
    Contractor · Scottsdale, AZ · Member since 2010 · 2k+ posts · 3k+ votes
    3y

    If you plan to hold onto the property forever, consider going for a 30 year fixed loan and then buying down the interest rate with "discount points."

    In this market, you might even get the seller to pay for some or all of those discount points.

    I don't think your accountant is steering you wrong. And your math is all very well thought out. But I'm just a huge fan of fixed rate loans when you have a choice. I was a mortgage loan officer in 2007 and I was processing modifications, short sales, and foreclosures in 2011. I saw way too many people negatively impacted by adjustable rate loans.

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  • Steve Vaughan
    Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
    3y
    Quote from @Brian Jackson:

    Why not refinance 5/1 ARM loans every 5 years rather than getting a fixed rate loan initially?

    It's a pain, it's costly and has additional risks. 
    Lenders may lose their appetite for lending on that asset type (had that happen with my commercial multis during the GRC) or you could have a job losss / tranfer or health issue. You name it.

    I agree with  @Scott E. about exploring seller concessions to buy down the rate. Ask your lender how much it would cost to buy down the fixed to the ARM rate and go from there.

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  • Carlos Ptriawan
    Member since 2019 · 7k+ posts · 4k+ votes
    3y
    Quote from @Brian Jackson:

    I spoke with an accountant who recommended I compare a 5/1 ARM vs a fixed rate loan in a spreadsheet. They said many times the ARM is the better option since less money goes to interest and you get lower payments which allow you to make additional payments to pay down the principal. I did a calc on today's real numbers (6.6 fixed vs 6.1 ARM) on a 1M loan and I save about $25,091 in interest (more equity) and pay about $19,620 less mortgage payments (opportunity to pay down the principal) at the end of the first 5 years. The lower monthly payment ($6059 for ARM vs $6386 for fixed) could go to principal. But you have to subtract out the cost of a possible refi if rates rise and you need to get out of the loan.

    The accountant says this would let me build up equity faster. After 5 years if rates go down you are golden but if rates go up you might get stuck refinancing into another 5/1 ARM or fixed loan with a high interest rate.

    On large loans like this 1M example, is a 5/1 ARM better than a fixed rate loan?

    Why not refinance 5/1 ARM loans every 5 years rather than getting a fixed rate loan initially?


    I always always always purchase ARM because of the amortization and faster equity building, but I dont buy 5 years because it's too fast, I purchase 10 year ARM.

    I could still get 10 year ARM for high 4% in this market LOL

    I am with your accountant that I always use ARM but why I do that is becoz I know mathematically my property would appreciate at x% rate at what year and my calculation is so damn accurate the realtor confused when I told it because it blows up the Zillow number.

    So here's the trick, make sure your appreciation rate at year 5 and year 10 is faster than your mortgage rate.
    For me, the rough calculation is like for $2200 monthly mortgage, the appreciation is like $4500 per month. In 10 years it translates making $700k

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