No. of Recommendations: 2
Hi Cam,

but now our mortgage guy is telling us that the annual cap on a standard ARM has recently jumped from 2% to 5%(!). Does this sound right?

No... he's just steering you to a lender with 5% initial caps.

While these caps might seem riskier, the loan program might also be giving you better rates... then again, maybe your L.O. is reaping the better rates in rebate.

Bottom lines are;
1) There are lenders NOW with 2-2-6 caps on 5/1 ARMs,
2) Have you chosen a Loan Officer you trust?

If so, seems like it makes ARMS quite a risky proposition. We're in southern CA if it makes a difference.

No difference... national wholesale lenders have 5/1 programs with 2-2-6 caps, and 5-2-5 caps.

On a similar note, does anyone have any thoughts on an interest only loan? A couple of people have suggested looking into them, but I don't really see the benefit.

The benefit is that they give you more control over your capital. You have the discretion of when and how much loan principal YOU choose to give back to the lender. This allows you to use your funds in financially wiser ways, IF you know what to do with your money.

If you feel that eliminating your mortgage interest (probably around 3-4% after tax deductions) is the best return you can get on your money (including your retirement accounts,) then you have the freedom to pay your monthly money towards principal.

If you honestly look in the mirror and you KNOW you don't trust yourself to manage your investments well, then you may be better off with a regularly ammortized loan as it forces you to "save" money by paying loan principal each month.

If you're already a disciplined saver and investor (at minimum to your retirement accounts,) then an interest-only loan is MUCH more beneficial for you... especially over time.

Dave Donhoff
Foolish Mortgage Broker
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