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Is an F.H.A 5 year adjustable right for you?

Posted on November 3, 2010 by Ray Williams.

Many of my younger clients who have owned their homes for 3-4 years have been shifting to 5 year A.R.M’s recently. The main reasons are they have been in their home 3-4 years, plan on selling and not paying this house off, and have been explained what the positives and negatives are.

As an example, right now you could go down to 3% for the next 5 years, then the maximum (not necessarily) your rate could be in the next year is 4% for 12 months, and then 5% for the next 12 months, and so on. So for 7 years, you are at or below 5% which gives you quite a bit of time. If you have lived there 4 years would you sell by year 10-11?

The breakdown of a recent client’s situation.

Current Loan v. 5 year is $260 less per month for 5 years. If they take that $260 and send it to the new mortgage as extra principal (not a requirement, just disciplined approach to money) every month, they will owe $26K less than they are on track for right now in 5 years from now. And right now they have a 5% fixed rate, so that is pretty impressive. Now they do owe about $300K, so payment savings can vary.

But if you look at dollar cost averaging of payments over time, and were to apply the monthly savings ( 3%, 5 year A.R.M to 5%, 30 year fixed) to the new loan for the next 5 years, and savings in year 6, and 7, you would undoubtedly owe substantially less than your counterpart who had a 5% 30 year fixed. What would that extra money do for you? What if you applied it to credit card debt, or student loans, or put it in savings, investments in commodities?

But only you’ll know if it is right for you and you are disciplined enough to apply it wisely.

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