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Discussion Starter · #1 ·
I'm sure this has been discussed but I can't get the search to bring anything up. We are buying a house and the fixed rate is 6.25% while the variable is 5.25% for the first four years, then add 2%. We have budgeted for the higher amount. So now we are wondering if it would be better to take the variable and then sink the extra monthly cash directly into the principle. I know we would have to be really strict with ourselves about this and also watch the rates to know when to refinance.<br><br>
Is this a good plan? Will doing this and then refinancing on the lower amount save us money? Is it too risky? Any advice is appreciated.
 

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I am sure there will be more informed advice forthcoming but the major obvious drawback to the variable rate mortgage is that you are ASSUMING you COULD refinance in a few years.<br><br>
As the credit market tightens loans are getting more and more difficult to obtain. You also don't know if fixed interest rates will be better in four years. Remember in the 1980s they were in double figures. If you have a major financial crisis in the meanwhile (major medical event, job loss, etc.) this could affect your credit score and you might not be able to get a loan as good as the fixed rate one available to you now. If property values plumet in your area you may not be able to get a loan to cover your current one. Finally, you would also need to figure in the refinancing fees and expenses into your equation.<br><br>
I suspect that while the variable rate option may look better from a sheer numbers standpoint, when you put topsy turvy financial markets into the equation, going with the conventional mortgage will offer you more security. I don't know about you, but security is something I'm willing to pay a little extra for. You can always start paying down principle in a few years when your income increases but your payment doesn't.<br><br>
Hope this helps.
 

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Fixed rate. Fixed rate. Fixed rate.<br><br>
You have heard about the inflation we're experiencing, yes? Eventually that will hit the banks and affect debt. Your 'cheap' variable could hit double digits.<br><br>
Lock in the lowest rate you can find and pay off the mortgage as fast as you can.<br><br>
V
 

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fixed. The variable rate may be low now, but it may not be in 3 years. It could be higher than the fixed rate & then add 2% more ontop of that.<br><br>
We have a HELOC & no mortgage. The HELOC rate started at 6.25% last august, it is now 5%. The only reason I was okay with this is because we're selling this place & when we do it has to be paid off.
 

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i agree with fixed rate- from semi personal experience. my cousin did an adjustable and lost her house 4 years later bc they could not refinance and the rates really jumped. (she did sell- and advoided backrupcy)<br><br>
in the long run the fixed is much smarter- IMO!
 

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With fixed as low as it is, go with the fixed.<br><br>
When we bought our house in 99, we started w/7.75% fixed rate. A couple of years later, we refi'd to 5.5% adj rate, with 1% cap per year. We figured even if it went up the full% each year, it would still take 3 years to be higher. The first year, it went down to 4.5%. Then, a year and a half ago, we refi'd again into a fixed rate of 6%. I like the certainty and 6% is still really low.
 

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Here are some numbers, assuming a loan amount of $100,000, a loan period of 30 years, and no prepayments, late payments or anything like that.<br><br>
Scenario 1: 5.25% for 4 years, adjust to 7.25%, no future adjustments<br>
total interest paid: $135,375.71<br><br>
Scenario 2: 6.25% fixed rate for 30 years<br>
total interest paid: $121,656.04<br><br>
Scenario 3: 5.25% for 4 years, adjust upward to cap of 15% in increments of 2% a year<br>
total interest paid: $254,224.53<br><br>
Your mortgage payment (not including taxes, ins, etc) at:<br><br>
5.25%: $552.20<br>
6.25%: $615.72<br>
7.25%: $669.47<br>
15%: $1,264.44<br><br>
So sure, you could save yourself $63.52 for 4 years, which comes up to $3048.96 How much do you think it will cost to refinance, if that option is even available? Every month that you don't refinance after the first 48, you're paying an extra $53.75 over what you could have had at the fixed rate.<br><br>
I threw in the 15% stuff because...are you sure that the adjustable mortgage only adjusts once to 7.25%? Even if that's the case, your loan would cost $13,719,67 more than the fixed rate loan. Generally speaking adjustable rate loans adjust by up to a certain amount every fixed period of time, for instance, by up to 2% every 24 months or something similar to that, not by one jump one time.<br><br>
I would go with the fixed rate loan in this instance just because the savings are so paltry that you would have to spend most or all of that money just to refinance, and then you'd have that hanging over your head for the next 4 years.
 

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I'd go for the fixed myself. 6.25% sounds pretty good these days. If you can afford it, could you get a small discount on the rate by paying a point (1% of the loan amount)? Use the calculators at bankrate.com to figure out whether that would save you money in the long run or not; it won't always, but sometimes it will. If you've budgeted for the higher amount already, I'd take that extra and either sink it into savings, or put it toward your principal to pay the loan off even faster. Meanwhile, I'd focus on keeping your credit good and doing what you can to maintain/improve the home you're buying, so that if things do change even better in the next few years, you could refinance. But there's no way in today's market that I'd want to mess with a variable rate!
 

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Another vote for fixed rate!!!<br><br>
PPs have already pointed out all the reasons why a fixed rate is better, so I don't have much to add.<br><br>
Just remember this- just a few years ago, millions of Americans made the same assumptions about variable rates that you are now making (that you can refi, that it will only jump once, that you can/will budget for higher payments,etc) and now we have the highest foreclosure rates we've ever seen in this country, and that is a major contributing factor the economic downturn. Those variable rates are bad news, plain and simple.
 

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Fixed rate, absolutely. I work in the mortgage industry and I can't tell you how many people have come to us to refinance when their variable rate was about to adjust and were unable to. In some cases, payments jumped upwards of $500. Not worth it.
 

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Fixed. In fact, we just converted all of our variable-rate debt to fixed-rate (we moved car loan and credit card debt to a fixed-rate home equity loan). I don't trust the economy not to explode. <img alt="" class="inlineimg" src="http://www.mothering.com/discussions/images/smilies/orngbiggrin.gif" style="border:0px solid;" title="orange big grin"> In seriousness, I don't want to give someone else control over my interest rate, and if there is any room for rejection or interpretation (or rate hikes!), that is too precarious for my comfort.
 

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Discussion Starter · #13 ·
Thanks everyone! The fixed rate is what I am comfortable with and had been planning on all along, but then dh came home with the variable rate info. He really wanted to consider it and so I told him I would look into it. Thank you all for confirming that it is a big risk. My feeling is that buying our first house is a big enough undertaking without adding unneeded risk. We are looking at ways to budget to pay the principle down at quickly as we can, and we have already decided on paying a point. Thanks again for the info. if you have any other tips please let me know.
 

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Fixed rate, hands down.<br><br>
Then, keep an eye on interest rates. If they go down significantly for fixed rate mortgages, you can re-fi. You can often get your own lender to do a re-fi with low or no closing costs if they know you will use someone else otherwise.
 

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<div style="margin:20px;margin-top:5px;">
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<table border="0" cellpadding="6" cellspacing="0" width="99%"><tr><td class="alt2" style="border:1px inset;">
<div>Originally Posted by <strong>Violet2</strong> <a href="/community/forum/post/11566351"><img alt="View Post" class="inlineimg" src="/community/img/forum/go_quote.gif" style="border:0px solid;"></a></div>
<div style="font-style:italic;">Fixed rate. Fixed rate. Fixed rate.</div>
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As Dave Ramsey often says, where do you think it will go? UP! Always UP!<br><br>
You know all those people who got behind on their mortgages and are going through foreclosure now? A LOT of those were the ARMS (adjustable aka variable).<br><br>
I don't think I need to say anything more than that.
 

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Glad you settled on the fixed!<img alt="" class="inlineimg" src="http://www.mothering.com/discussions/images/smilies/thumb.gif" style="border:0px solid;" title="thumbs up"> 6.25 is still pretty cheap compared to the 18 percents of the 80s.
 

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FIXED!!!!!!<br><br>
if interest rates go down significantly you can always refinance . . . .
 

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<div style="margin:20px;margin-top:5px;">
<div class="smallfont" style="margin-bottom:2px;">Quote:</div>
<table border="0" cellpadding="6" cellspacing="0" width="99%"><tr><td class="alt2" style="border:1px inset;">
<div>Originally Posted by <strong>lilyka</strong> <a href="/community/forum/post/11572287"><img alt="View Post" class="inlineimg" src="/community/img/forum/go_quote.gif" style="border:0px solid;"></a></div>
<div style="font-style:italic;">FIXED!!!!!!<br><br>
if interest rates go down significantly you can always refinance . . . .</div>
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YEAH that. You can never count on interest rates dropping or staying low, so DON'T put yourself in that situation. But if you go for the fixed and rates do fall for some reason in a few years, then you can still take advantage of the drop by refinancing at the lower rate. Protect yourself, and don't be swayed by a few years of lower payments!<br><br>
How many people are out there right now, do you think, that are wishing they'd never heard of an ARM?
 
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