UrbanTurf Reader Asks: Is the 5/1 Adjustable Rate Mortgage Worth It?

by UrbanTurf Staff


In this installment of UrbanTurf Reader Asks, a reader wonders if a 5/1 adjustable rate mortgage makes more sense than a long-term conventional loan if he plans on sellling in 5 to 7 years.

I’m 32 and considering buying my first home. I’ve been told I should consider a 5/1 ARM (adjustable rate mortgage), since this will get me better rates than a conventional 30-year mortgage for the first five years. I know that the rate (currently around 3 percent) will go up noticeably in the sixth year to something that will be much higher than if I were to go the 30-year mortgage route, and it will continue to adjust higher for each year thereafter. But given my age, I’m almost certain I won’t stay in the unit longer than 5 to 7 years.

Does the UrbanTurf audience think that the lower rate I’d get for the first five years of a 5/1 ARM is worth the risk that I don’t move after five years and my rate goes higher than a conventional 30-year mortgage?

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This article originally published at http://dc.urbanturf.com/articles/blog/urbanturf_reader_asks_is_the_5_1_adjustable_rate_mortgage_worth_it/4335


  1. ted said at 3:50 pm on Wednesday October 12, 2011:

    The 5/1 can be a risky option. If you didn’t sell in five years, the rate would go up to at least 7 percent, so you would have to calculate how long you could pay the increasing rate to make it worth not going with the conventional option.

  1. srt said at 4:07 pm on Wednesday October 12, 2011:

    The rates are so low on 30 year loans that a 5-1 doesn’t make sense to me, even if you were going to likely only be there 5 years.

  1. AP said at 4:58 pm on Wednesday October 12, 2011:

    I thought a 5/1 adjustable rate mortgage could go up or down depending on where interest rates are when it’s time for the mortgage to adjust.  I think chances are that in five years interest rates will be higher than they are now so your payment will go up.  But if for some reason rates go down, your payment will actually go down as well.  It just depends on where we are in the cycle. 

    If you are fairly certain you will be selling your home in the next five to seven years, I don’t think a 5/1 mortgage is such a bad idea because you will have lower payments in the short-term.  Who knows where rates will be in five years.  I mean look at rates now…nobody ever thought they would get this low.  People who got 5/1 mortgages five years ago are probably thrilled right now!

  1. mona said at 5:35 pm on Wednesday October 12, 2011:

    First thing I would look at isn’t the interest rate but your habits. Do you have a job that would for sure having you moving in 5 or < years? Do you have a bit of the wanderlust and just like moving sometimes? Are you looking at this first house as an investment to do your time in then sell and move to bigger place, maybe get married and have kids and move to bigger place. If you find that you are someone who tends to get some where and stay then a 5/1 ARM may not be for you. Rates could be way higher 5 yrs from now and if you can’t with some reasonable assurance that you won’t be there in 5 yrs then it is a bit of a crap shoot to be playing with a lot of money. Remember alot of people who are facing foreclosure now took a bit of a risk with ARMS when things were crazy and they saw prices going up and they just wanted to get in the game. When the market let go and those rates adjusted some folks got hurt bad. The of course some did real well cause rates dropped even low. That isn’t likely to happen this time.

  1. Elizabeth said at 9:40 pm on Wednesday October 12, 2011:

    While I can understand the risk of the 5/1 ARM, it was the best choice for me. The rate (2 years ago) was unbelievable - 3.75% - and I was able to lock into a rate and deal that my adjustable rate can only go up (or down) 1% per year.  I figured out that as long as I sold before the 8th year, I would be saving over the 30 year fixed.  I’ll admit that I’m considering refinancing to a lower 30 year rate and keeping the properly beyond 8 years, but as an investment property.  If the rate hadn’t dropped as much as it has, I probably wouldn’t be considering it.

  1. Rob said at 11:04 pm on Wednesday October 12, 2011:

    Forget the question of which mortgage to get.  If you’re almost certain you’ll move within 5-7 years, you shouldn’t buy at all.  The costs of buying and selling are about 10% of the price, so the value needs to go up at least that much for you to avoid losing money.  And property values are unlikely to go up by that much within only 5-7 years.

  1. JD said at 9:19 am on Thursday October 13, 2011:

    I’m closing soon on a place in DC and had this same issue.  In deciding between a 7/1 ARM at 3.375% (I figure the extra 2 years gave a little more flexibility than a 5/1); versus a 30 year fixed at 4%.  Even though it is likely we will move in the 5 to 7 year period; we figure the security and piece of mind was worth the extra $125 per month during the first 7 years.  So, we choose the 30 year fixed rate.  What happens if real estate prices drop and we don’t want to sell at a loss?  What happens if we can’t find a buyer?  What if we decide to stay?  What if we decide to hold the property for investment purposes?  Maybe prices will increase so much; we can refinance to take some equity out (or just borrow against the home’s value) to use for another downpayment and then rent the current place out.

    There so many things that can occur in the next 5 to 7 years either in your personal life or in the economy that can change your plans.  So for me, at least, I felt the security of the 30 year fixed rate was well worth the additional monthly payments in the short-term.

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