San Diego Mortgage Advice: Do ARMs Really Work?

This award-winning post about ARMs brought me a ton of questions today. 

Let's take a look at what Kelly Sibilsky, a RE/MAX Realtor in Lake Zurich, IL, said:

I got a 7 year ARM a few years ago because it was the lowest rate available (in the 4's). We selected an ARM based on how long we thought we might remain in the house. When the time is up, we will refi or sell. At any rate (no pun intended), we've saved oodles of money over the past few years with our low, low rate. Even if we refi to a higher rate, the money we will have saved over the 7 years is still money we have saved, that benefit doesn't go away!

I've had so many buyers say to me "I must have a fixed rate" when they only plan to be in the house for 4-5 years. I tell them to talk with their lender - fixed is not always better - look at the WHOLE PICTURE of your financial situation and then decide. Thanks for a great post.

No, thank YOU , Kelly for explaining in layman's terms what so many of us money geeks forget to explain simply.  For the engineers in the crowd, Here's what Kelly said:

IF... the 30 year fixed rate= F,  AND...the 7-Year Fixed Period ARM = A   AND...the "new future loan" = N

The probability of the negative impact of the delta between N and A is less than the sum of the delta between F and A.    I think.

Kelly hit the nail on the head with her comment.  It's no surprise that she's an Accredited Buyer's Representative (ABR), a designation featuring her expertise at counseling home buyers.

Intermediate-Term ARMs can really save people money.  Today, the difference between a three-year fixed ARM and a 30 year fixed rate loan is .75%.  Here's why you might consider this option:

1- An inverted yield curve generally foreshadows a recession, which leads to lower rates.
2- Interest rates  generally run in 3-5 year cycles; we are in the third year of an up cycle.
3- A three year ARM takes us out to the 6th year of a cycle.
4- Even if we need 7 years, the rate cap would only take you up 2% in rate; you've already saved 2.25% in the three years by opting for the 3-year fixed ARM.
5- The average homeowner refinances every three years, and moves every six years.

Nothing is guaranteed but sometimes you need to look at the economy and say, "What REALLY makes sense, here?"