Expert: Jessica Bryan - 1/3/2011

Question
I am a first time homebuyer in the Los Angeles area. I will be using FHA financing. I am only able to get approved for around a $200K loan, which limits me to purchasing condominiums in my area. My goal is to keep this first property for about 5 years and sell it for a small profit. I would then take that profit and use it as the downpayment on my next home. My question is in regards as to whether it is more advisable for someone in this scenario to use a 30-year, fixed-rate mortgage or if I should used a 5, 7, or 10 year ARM? Since I plan to stay in my first home for 5 years, it seems to make sense that using an ARM is justified, but I would very much like you to weigh in on this matter. Thank-you for your assistance.

Answer
Hi Mike;
At the present time fixed rates and Arm's are both historically low and either is really good to use depending upon your time spent in the home.  If you can get a good ARM that adjusts over the next four or five years with less or the same as what you would pay for the fixed rate then you should do that.  Here is a suggestion so you know what is best for you.  Go to your lender and discuss your options.  Have the lender run the numbers for each of the payments.  If there is enough of a difference between the two loans and if you can maybe pay the higher amount, then go with the ARM and pay off more than what your actual payment is.  Since an ARM is calculated on the remaining principal, you will actually have more equity when you go to sell your home later. I really like ARM's for people who are staying in their homes for a short time; but they are more complicated and should be scrutinized carefully. (Arm's are the loans that got lots of people into the financial problems with their mortgages since they often had larger payments later as the loans adjusted up from their low point.)

I also like an ARM for people who have job security with knowledge that they will be getting raises on a yearly basis making it equally affordable as the rate increases.

Best wishes in your home search and purchase.

Sincerely,
Jessica Bryan