7ARM vs 30yr fixed, 255K loan, 0% down

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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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

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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

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