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Hi AJ,

Re; 5 yr ARMs
But it does have the risk of a significantly rising payment, i.e. 'payment shock'
Not really... the accumulated interest & amortization savings versus the heavier 30 FRM, over 5 years, in a worst-case cataclismic scenario, with zero returns on these savings, means the borrower can use these savings to supplement the ARM payments and still have paid less on the 30 FRM for at least 7 years. When they get a merely moderate interest credit on their reserves & savings, the benefit point stretches out further to 9-10 years.

If reserves & savings grow at the same rate as the ARM index increases (pretty much a no-brainer,) and anything less that global thermonuclear meltdown occurs, the benefit period stretches out significantly further than that.

All that has to be kept in the perspective that the average home occupancy is 3-7 years (depending on region, according to NAR,) and 19 out of 20 mortgages are paid off due to sale or refinance by their 7th year (according to FannieMae.)

'proper structuring' requires either a signifcant amount of current reserves, or a significant investment each month in excess of the FRM payment.

$250,000 purchase
$200,000 5 yr ARM @2.25% (vs 3.25% on a 30 FRM.. a 44% discount in interest costs,)
$25,000 HELOC @ 6% (No PMI)

$4,330 Gross Income
$3,887 take home income (after withholdings)
$1,212.42 housing (including 1.25% prop taxes & 0.3% hazard insurance)
$433 consumer payments ($28,800 credit card balances @ 18%)

That's a loan at 28/35 DTI ratios.

$10,000 reserves (x6 months of total lifestyle expenses,)
$2,251 monthly discretionary income

Capturing an average 6% tax free compounding rate on reserves & monthly savable income will have the borrowers owning a liquid cash account roughly equal to their post-amortization mortgage balance (and thereby debt-free) within 10 years... even if the ARM rates rise (along with the relative IUL returns that reflect rising caps from rising safe rates.)

No drawdowns.
No payment shocks.
Safety of liquidity maintained.

Dave Donhoff
Leverage Planner
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