Note: This post was originally written and meant to be posted around closing on the condo. I’ve adjusted it so that it still makes sense and in hopes that my thought process helps someone else, even if I didn’t end up closing on the loan.
In the search for my mortgage lender, I compared about five local credit unions, instead of going through a mortgage broker. A lot of the rates were comparable, but when you factored in the closing costs and the total cost of payments over the first seven years, two were pretty much a wash. One is the credit union which I use for my day-to-day banking.
I made a spreadsheet comparing the closing costs (and the total upfront costs), the interest rates, the monthly payments, the total cost of the loan over 30 years (assuming no pre-payments), the total cost of the loan with $500, $1200 or $2000 in monthly pre-payments after the first year, and the total cost over the first N=1..7 years with no pre-payments.
One credit union had ridiculously high closing costs in comparison to the other one (higher origination fee by 1% (!)) by a significant amount. One credit union dealt better with my preference to emails rather than phone calls during the work day.
I ran the numbers listed above for a 30 year fixed with and without points, a 7/1 ARM with and without points, and a 5/1 ARM. The 5/1 ARM was the clear winner, with the 7/1 ARM coming in second, and the 30 year fixed far behind.
How quickly could I pay the mortgage off if I threw all of my discretionary income at it? 7-10 years. From a financial perspective, the 5/1 ARM is thus risky and the 30 year fixed unnecessarily long. The 7/1 ARM isn’t so bad though because the balance after 84 payments on the loan could be around $40,000.
It thus came down to a life decision. How long did I see myself living in this place? If I saw myself trading up or moving in 5 years, the 5/1 ARM could make sense. But I see myself wanting out of a 2 bedroom condo in about 7 years, in mid-to-late 2018. That rules out the 5/1 ARM and makes the 0.5% lower rate on the 7/1 ARM over the 30 year fixed catchy. Or, if I don’t have kids, I could see myself staying in a condo for quite awhile since I have an aversion to spending time on house maintenance, in which case, I could afford to pay off the mortgage pretty close to around the 7 year mark.
So I signed on a 7/1 ARM amortized over 30 years with an initial rate of 3.5%.