30 Year Fixed rate mortgage at 7% interest w/ payment of $665.30. Loan after 10 years.
Year => Pricipal (payment)
2007 => 100,000 (payment is 665.30)
2012 => $94,015
2013 => $92,556
2014 => $91013
2015 => $89343
2016 => $87562
2017 => $85647
5/1 Year ARM mortgage at 5% for 5 years then increases 2% until the rate caps at 11% (6pts higher than the intitial rate). We will pay the same amount on this loan ($665.30/month) as we would the Fixed rate loan.
Year => Pricipal (payment)
2007 => 100,000 (payment is 536.82 at 5%)
2012 => $82966 = (payment is 586.39 at 7%)
2013 => $80510 = (payment is $683.00 at 9%) $18 more than the fixed
2014 => $78535 = (payment is 791.74 at 11%) $126.44 more than the 7% fixed
2015 => $77557 = (payment is 791.02 at 11%) $126.44 more than the 7% fixed
2016 => $76467 = (payment is 790.21 at 11%) $126.44 more than the 7% fixed
2017 => $75253 = (payment is 790.21 at 11%) $126.44 more than the 7% fixed
In this example, we compare the ARM vs the Fixd. We pay $665.30 on both loans from 2007 to 2012, the ARM is ahead. In year 2012, the ARM rate goes from 5% to 7%, then in 2013, the rate goes to 9%, and in 2014 the rate caps out at 11% and stays that way. We are force to pay a higher note right. WRONG!!!!!!!
Because we have 20% equity by going the ARM route, we get to DROP the PMI in year 2013 (about 1% of the original note or $100). We take that $100 and apply it to the note and now we are STILL ahead of the FIXED. So instead of paying $665 per month, we pay $775 in year 2013 and so forth. You can see in year 2017 with the Fixed, we don't have 20% equity in the house, so we are still paying PMI.
Year => Pricipal (payment)
2013 => $78314 = (payment is $691.80 at 9%, but we apply $73 toward the principle because we no longer pay PMI)
2014 => $77338 = (payment is 788.80 at 11%) $23 more than the 7% loan with PMI.
2015 => $76375 = (payment is 788.80 at 11%) $23 more than the 7% loan with PMI.
2016 => $75302 = (payment is 788.80 at 11%) $23 more than the 7% loan with PMI.
2017 => $74106 = (payment is 788.80 at 11%) $23 more than the 7% loan with PMI.
At then end of 10 years, we owe $85,657 on the 7% Fixed rate loan and we owe $74,106 on the ARM which has seen its WORST CASE as far as interest rate in concerned at 11%. We were forced to pay $23 more a month in year 2014 on the note because of this.
You guys are so stuck on getting a low fixed interest rate, you don't realize that you are PAYING MORE for a mortgage loan. I HOPE this example sheds some light on you.