The argument over which of the two loans to do is really interesting. Below is the worst case scenario of the first 5 years of each loan. See what your choice is and see below for Big T’s ultimately correct choice.
|Term||FHA 1 yr.||P/I||P/I||Fixed|
- TERM: $100,000 loan
- Fixed mortgage stays the same all the time
- Adjustable rate mortgage can go up or down 1% per year
- Adjustable rate mortgages can go up 5% over the life of the loan. And it does go down quite often.
MY ANSWER IS THIS: If you do the math, at the end of 5 years (worst case scenario) the two programs are equal in terms of savings. In other words, for the 1st 2 years the adjustable rate mortgage provides a tremendous amount of savings, the 3rd year the two loans are even and in the last two years the savings of doing the fixed rate equals the losses incurred because the adjustable rate is now higher. So it looks like a toss-up….looks like…kinda….not really because here is what the savvy buyer should do….or at least I would…the question is whether I am savvy or not…I digress.
I would do the adjustable rate for 3 years, apply the saved money to the unpaid balance on my loan and take a few years off my mortgage, then refinance at the end of the 2nd year and be way ahead. Let’s do the math. During the 1st year of the adjustable, I will save $130 per month or a total of $1,560 the 1st year. The 2nd year, I will save $65 a month or $780 over the year. The two year total equals $2,340 (that’s a lot). If I applied my monthly savings every month against the unpaid balance, I would make the equivilant 4 years of payments on my house which would save me $26,400 worth of interest over the life of the loan. Now that’s the kind of savings I’m talking about!!! And all I did was be smart. The refinance at the end of the 2nd year would cost about $400, chump change compared to the savings. Think about it and if you need help sorting it out, email me and you’ll be surprised.