5/1 ARM vs a fixed rate loan

[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?

[Scott E.]

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.