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I have seen previous questions from close to 6-8 years ago on this subject and so I am asking here for:

  1. relevance to 2020 (esp in the context of historic low rates and Covid-19)
  2. from an inverted perspective

It seemed like from previous answers that 30-year fixed mortgage is safer. That said I'd like to understand under what conditions does a 7-1 ARM or 5-1 ARM definitely make sense? How should I evaluate this?

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    Please clarify: Are you looking for a comparison of ARM vs fixed rate, or 7/1 ARM vs 3/1 ARM? Is there something specific about the COVID-19 crisis that you are concerned will affect mortgages? What do you mean by “inverted perspective”? – Ben Miller - Remember Monica Jun 8 at 11:35
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    Question says "3-year fixed mortgage;" do you mean "30-year fixed" or "3-year ARM"? – shoover Jun 9 at 20:36
  • Fixed it. I meant 30-year fixed. By Inverted I meant (instead of 'why is a better than b' the question is more of 'under what circumstances b is better than a') – perennial_noob Jun 10 at 4:26
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A long time ago we had a 7/23 mortgage. The rate only adjusted once at the 7 year mark. That gave us a target for moving up from a townhouse to a single family house. For those first 7 years the rate was fixed at a rate lower than the 30 year mortgages that our neighbors were getting. It worked out great. I also have had experience with a mortgage that adjusted every year, which I hated.

If you know that you will either sell or refinance during that initial period, then if the rates are better than a 30 year mortgage it can make sense. Of course there is risk that you can't refinance or sell by the deadline. You need to understand the maximum adjustment that can be made after the initial period. In my case I knew that I had another 4 or 5 years at the maximum adjustment before the 7/23 was the wrong choice.

When deciding which type of mortgage (30, 20, 15, adjustable, 3/1, 5/1, interest only) the big question is what helps you afford the place you need. It is more than just the first few payments but over the expected usage you will have. Do you plan on refinancing? do you plan on moving in X years? The risk is that you get into a loan that has a profile that in the long term hurts you.

An example of getting hurt: Getting an interest only loan when prices were going up 10% a year, and people could sell their house for an amount over list price in a few days. It is great until the prices drop, and it takes many months to even get a below list price offer. They suddenly realized that the interest only loan was the wrong choice.

Others in the past used an exotic mortgage to be able to barely afford their dream house, only to not be able to afford the payments a few years later. Some even got loans that had the monthly payment below the interest charged. The amount owed grew each month.

The answer is: it always depends. It depends our your situation, and needs. There is not a one-size-fits-all answer. Don't rely on the lender/broker to make these calculations, they have a vested interest in getting you to pick them, and to pick a loan they like.

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If you plan on selling or paying off your mortgage in 5-7 years then the ARM makes sense. You'll have a lower interest rate than with the 30-year fixed.

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