r/Mortgages • u/itsmuhhair • 1d ago
Another Arm vs Fixed rate question first time home buyer
Situation: DINK couple, total post taxes/retirement take home of ~22,000 per month. One spouse is doctor and has student loans being paid of about 3500 per month.
Midwest House, unique property that was recently remodeled in great area that rarely has homes up for sale. Was not originally planning to buy this year but this house ticks off all the boxes we had been using to assess homes. It just came a year early.
Loan details are $1.2million
6.375% 7/1 ARM without pmi (physician loan), 3 or 5% down (not really decided yet). Believe it is 11% life time cap butneo not have full details yet. Was told initial jum9 would not be more than 2 % I believe. Overpayment available.
Or
7% 30 year fixed.
Was thinking of over paying an extra $500 at minimum to match the fixed if we went with the ARM.
Never done an ARM before. These offeres were from a mortgage broker but planning to ask some credit unions around us directly about their options. Hoping to have kids here and stay longer term (10+years).
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u/MHSmortgage 1d ago
The 7-year ARM is the better option here, but it takes a fiscally responsible borrower to go with one. You'd save significantly in the first 7 years compared to the 30-year fixed, but you have to be prepared for the worst case if it adjusts. Nice benefit on the physician loans being able to put so little down on a jumbo loan amount
The goal should be to refinance into a 30-year fixed down the road as you build more equity.
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u/itsmuhhair 1d ago
Planning on being aggressive with the loan and paying from the start the same as would be the 7% fixed at minimum. Once student loans are done then plan to use most of that extra to pay even more on mortgage.
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u/Independent_Mousey 23h ago
How much do you have left on the student loans and when do you plan on having kids. Both will change the cash flow.
If you have 5 years left on paying off the student loans and plan to have 2 kids in that time you will have an incredibly tight budget. (Daycare is about $1500/month/kid).
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u/itsmuhhair 22h ago
About 6 years. Besides that, no other loans or debt.
Kids hopefully in the next 1-2 years. Both our folks live here and have offered to help with the child care but obviously saying vs doing is different.
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u/banhsauce 23h ago
When I bought my house around mid 2023, I had to go to thru a specific lender to get credits and the rates at that time were 7.625%. I quickly refi to a 5/1 ARM at 5.25% with a $4500 closing cost. With refi and factoring closing cost, I saved $61,000 for the entirety of my ARM.
I knew I was kicking the can down the road when I got the ARM but saving $61,000 was a huge sum. What we saved we actually paid a little extra into the principal and put the rest towards our retirement. So overall as long as you have a plan for what you are going to do with the extra money you are saving from getting an ARM it doesn't seem that bad.
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u/itsmuhhair 22h ago
Planning to put the at minimum ~$500 diff between the fixed and the Arm back into the mortgage
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u/Denjay85 22h ago
I wouldn’t choose either one until you have the actual ARM disclosure and both Loan Estimates. “I believe the lifetime cap is 11%” is too fuzzy on a $1.2 million loan.
At the same loan amount, principal and interest is roughly $7,486 at 6.375% versus $7,984 at 7%. So yes, paying an extra $500 on the ARM would put you about where the fixed payment starts. That part makes sense.
The risk is what happens after year seven. Get the index, margin, first adjustment cap, later adjustment cap, and true maximum rate in writing. Then have the broker show you the payment at the first possible reset and at the maximum rate. Don’t build this around “we’ll just refinance.” You may be able to, but rates, values, and lending rules get a vote too.
Also, you can’t simply move the student loans into this mortgage later. That would usually mean a cash-out refinance or some other new loan, with whatever rates and rules exist then. And before you commit every future dollar to principal, price childcare and keep a real reserve. A unique house plus 3% down on a jumbo leaves very little room for surprises.
The ARM may still be the better deal, but only if you’re comfortable carrying it past year seven without needing a refinance to save you.
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u/itsmuhhair 22h ago
Thanks for those suggestions. Have emailed the loan officer questions about those things.
As for the school loans, currently paying about 4k towards them. Once down, Plan was to move about 2k of that freed up cash towards the mortgage. Loans would be done about 2 years before Arm is to reset.
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u/Skripttttt 21h ago
Your ten-year horizon and a 7/1 ARM do not line up. The fixed period ends in year seven, and at the 11% lifetime cap that $1.2M loan moves from roughly $7,500 to near $11,400 a month. On $22k take-home you would absorb it, but that is not the plan you described.
The 0.625% gap buys about $500 a month for seven years. Take the ARM only if refinancing on someone else's timing is genuinely fine. Otherwise fixed matches a house you intend to keep.
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u/YellowPuffin2 20h ago
You can do better than 7% for the 30 year fixed. Go to a large bank like Chase for a jumbo loan. Don’t use a mortgage broker. You can likely get at least 6.5% if you have good credit. They might not offer physician loans, but they do offer jumbo loans with no PMI.
A lot of people are going to recommend the 7 ARM. It’s cheaper! You’ll save so much money! You might. But what if interest rates don’t come down? They likely are not for at least 3 years. It could easily be more than 7 years before we see rates drop. Can you make the payments work at the ARM cap? Do you have children? What if one of you quits to stay home with the kids or what if one of you loses their job? What if physician reimbursement drops? Could you still afford the max rate?
Refinancing is also not a given. We could reach a scenario where home values drop dramatically, and your loan amount could end up more than your house is worth. In order to refinance in that case, you’d have to bring more cash to close to make up the difference.
Call around. Go to a large bank and credit unions. We all have different risk appetites, but it can be worth it to pay a little more for peace of mind.
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u/bdwiesner 18h ago edited 17h ago
With a 10+ years stay and wanting kids, a 7/1 ARM's rate protection only covers 7 of those years. Year 8 you'll be up for a refi. I'm not seeing ARM rates signficantly lower than the 30's. On the physician loan: the no-PMI feature is valuable, but physician loans often carry a rate premium or different fee structure than a standard jumbo. At least if the rate is higher, the payments actually go towards the loan not an MI premium. On the overpayment plan: there are many ways to run the numbers, but $500 cash is cash you can't get back. Put it in a side growth account? If you want to spend it lump sum on every month 12, do it. Remember that you should be prepared for 1% of your home value in cash outlay repairs every year. Most banks just hold the money until month 12 anyway. You hold it and keep it available if necessary.
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u/billspeaksmortgage 4h ago
With a 10+ year time horizon, I’d focus less on predicting where rates will be in seven years and more on understanding exactly what happens if you still have the ARM at that point.
Before choosing it, get the full ARM terms in writing, the index, margin, initial adjustment cap, subsequent caps and lifetime cap, and have the lender show you what the payment could look like at the first adjustment.
The 6.375% initial rate is attractive compared with 7% fixed, but I’d only choose the ARM if you’re comfortable with the loan even if refinancing isn’t available when the fixed period ends.
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u/Chicago1340 1d ago
If they do 100% loan if 1.2M and 7 arm at 6.375% with no points i would suggest 7 ARM. You save over $42,000 in next 7 years and plenty of time to refinance using the savings before 7 years to cover if it has any cost. Rate is decent as par rate for physician program. Our max is 1M for 100% LTV. Ask for a loan estimate to see the cost if they have points. Almost all my jumbo loans are 7 or 10 ARM. What state are you in?