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Financial Planning - Financial planning in general. (Moderated)
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Posted by on March 1, 2008, 1:01 pm
what do you think of the following scenario. Let's say I can take 7ARM
at 5.35 or 30yr fixed at 6.35. Take any amortization calculator and
you will see that over 7 years you will pay 90K in interest (7ARM) or
108K in interest (30 yr fixed). so you "save" 18K in interest. Let's
say at the end of yr 7th you need to refinance and the rate is
9%...well .. then you pay 4K in closing cost and you can use say 5K-7K
to pay points to bring the rate to 6ish level. is it feasible ?
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Misc.invest.financial-plan is a moderated newsgroup where Moderators strive
to keep the conversations on-topic for financial planning. Other posting
guidelines include a request for brevity and another for trimming posts to
which we respond. For all of the other tips and suggestions, see "FROM THE
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Posted by joeu2004 on March 1, 2008, 3:18 pm
On Mar 1, 10:01 am, chilangopol...@gmail.com wrote:
> what do you think of the following scenario. Let's say I can take
> 7ARM at 5.35 or 30yr fixed at 6.35. Take any amortization
> calculator and you will see that over 7 years you will pay 90K
> in interest (7ARM) or 108K in interest (30 yr fixed). so you "save"
> 18K in interest. Let's say at the end of yr 7th you need to
> refinance and the rate is 9%...well .. then you pay 4K in closing
> cost and you can use say 5K-7K to pay points to bring the rate
> to 6ish level. is it feasible ?
You neglected to say that you are talking about a 255K loan.
What makes you think you could get a "6ish level" loan in 7 years,
even if you could pay 2-3% points, if the fixed rate then is 9ish%?
Besides the economic uncertainty, there are uncertainties about
your ability to qualify for such a favorable interest rate.
Even if you could get it down to the same rate as the original
fixed rate loan (6.35%), you are talking about a savings in interest
of about 8% over 30 years -- about 0.3% per year. Even less when
you factor in the forecasted refinance costs, which are debatable.
Using your figures (9-11K), that reduces the savings to about 5%
over 30 years -- about 0.2% per year.
(And that ass-u-me-s that today's finance costs -- points and
closing costs -- are the same for both the ARM and fixed-rate
loan that you mention. You neglected to say.)
That seems like a lot of risk for arguably little gain.
IMHO, an ARM makes sense only if you expect to sell the property
within the fixed-rate term of the ARM. If you are attracted by the
lower monthly payment, beware that you have no idea what that
will be after the initial fixed-rate term.
If a savings of less than 1K/year over 30 years makes that much
difference to you, perhaps you should reconsider whether you are
ready to get into so much debt.
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Misc.invest.financial-plan is a moderated newsgroup where Moderators strive
to keep the conversations on-topic for financial planning. Other posting
guidelines include a request for brevity and another for trimming posts to
which we respond. For all of the other tips and suggestions, see "FROM THE
MODERATORS: Posting to misc.invest.financial-plan", a weekly post now on the
Newsgroup.
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Posted by joetaxpayer on March 1, 2008, 3:18 pm
chilangopolaco@gmail.com wrote:
> what do you think of the following scenario. Let's say I can take 7ARM
> at 5.35 or 30yr fixed at 6.35. Take any amortization calculator and
> you will see that over 7 years you will pay 90K in interest (7ARM) or
> 108K in interest (30 yr fixed). so you "save" 18K in interest. Let's
> say at the end of yr 7th you need to refinance and the rate is
> 9%...well .. then you pay 4K in closing cost and you can use say 5K-7K
> to pay points to bring the rate to 6ish level. is it feasible ?
I trust the 7yr ARM is amortized over 30 years?
So with a mortgage of $255K, you have payments of $1424, and you end
year 7 owing $225,827.
At 9%, keeping 23 years remaining, the payments jump to $1940 (ouch), or
if you refinance out to 30 again, $1817.
But if you go 30 fixed now, you'll have a $1587 payment.
The question for me is not about the mortgage, but the rest of your
finances. What will change for you in 7 years? Is your job and your
spouses secure, and are you on a path toward raises and increased income?
(When I bought my house, we were planning a baby, and 7 years would have
gotten us right to where we had no child care cost, as an example. But
no, I went fixed, and refinanced 4 times since.)
No, you can't buy the rate down that much, last I knew a point was good
for 1/8% rate decrease (someone will help correct me I hope).
JOE
www.blog.joetaxpayer.com
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Misc.invest.financial-plan is a moderated newsgroup where Moderators strive
to keep the conversations on-topic for financial planning. Other posting
guidelines include a request for brevity and another for trimming posts to
which we respond. For all of the other tips and suggestions, see "FROM THE
MODERATORS: Posting to misc.invest.financial-plan", a weekly post now on the
Newsgroup.
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Posted by Douglas Johnson on March 1, 2008, 3:58 pm
chilangopolaco@gmail.com wrote:
>what do you think of the following scenario. Let's say I can take 7ARM
>at 5.35 or 30yr fixed at 6.35. Take any amortization calculator and
>you will see that over 7 years you will pay 90K in interest (7ARM) or
>108K in interest (30 yr fixed). so you "save" 18K in interest. Let's
>say at the end of yr 7th you need to refinance and the rate is
>9%..
And if the house is worth less than the mortgage, you can't refinance. Go
fixed. If you want to save on interest, go 15 year fixed. -- Doug
--------------------------------------
Misc.invest.financial-plan is a moderated newsgroup where Moderators strive
to keep the conversations on-topic for financial planning. Other posting
guidelines include a request for brevity and another for trimming posts to
which we respond. For all of the other tips and suggestions, see "FROM THE
MODERATORS: Posting to misc.invest.financial-plan", a weekly post now on the
Newsgroup.
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