I respect your opinion, and appreciate the perspective and honesty that you bring to the board
But, based on the facts posted and the assumptions enumerated below I still think it would be a keeper loan for me.
Granted I have not seen that additional terms such as index, margin and caps stated, and if these differ significantly from my assumptions I could change my mind. So, there are several big IFs here.
(Note: Never take out an ARM if you don;t know your caps, margin, and index and all terms of the loan such as pre-payment penalties, etc).
Here’s why I think it’s a keeper:
1. She said it will likely re-set to about 6%. I assume that the first adjustment to ~ 6% reflects an the fully indexed rate (e.g. LIBOR at ~ 5,2 + 1% margin or some other combination) First adjustments are typically capped at the max rate increase (e.g. 5%, but don;t know in this case).
2. If her 5/1 ARM was originally at 4.125% it is very likely that the maximum rate was set at 4.125+5 % or 9.125%, based on similar terms to 5/1 ARMS I investigated in the 2002-2003 time frame.
So, if I could turn back time and grab this loan (as I understand/interpret it), I would. In a heartbeat.
Reasons: The fully indexed rate is currently less than most 30-year fixed rates. And this is at a time when the yield curve is flat or slightly inverted. The spread is likely to be much greater if inflation increases.
The maximum rate may only by 9.125%. That’s a hefty increase from her original rate, but pretty good insurance if inflation rages in the future.
Again, if one has sufficient reserves my opinion is that this loan could be a keeper.
(Point may be mute, since the property is kinda sold in a rent-to-own way.)
