I am a 1st time home buyer and I have just accepted a counter offer from a seller for a house that I like. The next step was to apply and get a mortgage for buying this house. Some background on the house and type of loans that I was offered by a lender:
loan amt: ~200k
down payment: 15%
closing cost and any other fees paid in cash and not included in the loan amount.
- 7/1 ARM @ 3.5% with 5%/2%/5% for initial/periodic/lifetime rate caps monthly payment ~929 (excl pmi, insurance, taxes, utilities, ...) monthly prepayment 1.1k
- 4.75@30 yrs monthly payment ~1079 (excl pmi, insurance, taxes, utilities, ...) monthly prepayment 1k
I do not plan to stay in this house for more than 6-8 yrs (hopefully). Also, I am willing to prepay the loan by 1k every month, so eventually the interest that I pay out is very less.
My question is that, under these circumstances, is the 7/1 ARM a better option than the 30yr fixed?
If I do go with the 7/1, and due to different circumstances, I continue to stay in the same house, I would plan to refinance it as a 10yr fix, since by that time I would have paid more principal with the 7/1 than with the 30yr fixed.
Does this strategy make any financial sense?
Update: Thanks for all the suggestions and comments. The cautious me eventually won over the riskier me and I went along with the 30yr fixed. Also, another reason was that I got even better rate now that we have the upheaval about the downgrade going on.