The Mortgage & Closing Costs Explainer
SPECIFICATION
RE-03
CATEGORYReal Estate
FOCUSFixed vs. ARM rate-cap mechanics, PITI & the TRID disclosure timeline
BEST FORUnderstanding what your Loan Estimate and Closing Disclosure actually mean before you sign
METHODOLOGYTRID Loan Estimate/Closing Disclosure · ARM rate-cap structure · PITI breakdown
FORMAT.md + .txt
COMPATIBLE MODELS
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SKILL LEVELIntermediate
GENERAL ASSISTANT
I'm deciding between a 30-year fixed at 6.75% and a 5/1 ARM at 5.9% with 2/1/5 caps. Which is smarter?
ARMs have lower rates but can go up over time, so a fixed rate is usually safer. Closing costs are usually a few percent of the loan.
RE-03 — THE MORTGAGE & CLOSING COSTS EXPLAINER
I'm deciding between a 30-year fixed at 6.75% and a 5/1 ARM at 5.9% with 2/1/5 caps. Which is smarter?
I can't tell you which is 'smarter' for you specifically, but here's what the numbers actually mean: with 2/1/5 caps, your ARM rate is fixed at 5.9% for 5 years, then could rise up to 2 points at the first adjustment, up to 1 more point at each later adjustment, capped at 5 points total over the life of the loan - a ceiling of 10.9%.
The real question is whether you could comfortably afford the payment at that worst-case rate, and whether you're likely to move or refinance before the fixed period ends.
If you plan to be in the home only 5-7 years, the ARM's lower initial rate may be worth it;
for a long-term stay, the fixed rate's certainty has real value even at a higher starting rate.
The real question is whether you could comfortably afford the payment at that worst-case rate, and whether you're likely to move or refinance before the fixed period ends.
If you plan to be in the home only 5-7 years, the ARM's lower initial rate may be worth it;
for a long-term stay, the fixed rate's certainty has real value even at a higher starting rate.
