Traded a $20k builder credit for a 3.99% ARM instead of a 6.6% Fixed. Are we looking at the math correctly?
Hey everyone, my wife and I are closing on a $620k new build in August. The builder offered us two different financing routes through their preferred lender.
Option 1: The Standard Market Rate
• Type: 30-Year Fixed
• Rate: 6.6% (Current par rate)
• The Incentive: We get a $20,000 builder credit to use toward our closing costs or to buy down the rate.
Option 2: The Promotional ARM
• Type: 7/6 ARM (Adjusts every 6 months starting in Year 8)
• Rate: 3.99%
• Max Rate: 8.99% (With a max jump of 5% at the very first adjustment)
• The Incentive: We forfeit the $20k flexible credit, but the builder fully subsidizes the 3.99% rate so it costs us nothing out of pocket.
Our Logic/Strategy:
We decided to go with Option 2 (the 3.99% ARM). The monthly P&I savings are massive compared to 6.6%. To protect against the Year 8 "doomsday" scenario where the rate jumps to 8.99% and we can't refinance, our plan is to do one of two things:
- The Prepay Route: Voluntarily pay extra principal every month as if we had a ~6% fixed rate. If we hit the 8.99% cap in Year 8, the automatic recast is based on a much smaller balance, neutralizing the payment shock.
- The Investment Route: Pay the minimum 3.99% payment and invest the monthly savings in an index fund. By Year 7, we'd have a liquid war chest to either drop as a lump-sum principal payment right before the recast, or use to subsidize the higher payments until rates drop.
My Question:
Are we looking at this correctly? Was trading the $20k upfront credit for 7 years of 3.99% the better mathematical move? Are there any hidden traps in 7/6 ARMs or our "recast" logic that we are missing?
Edit
Loan amount is 495k as we are putting down 20%. We have no other debts and have a history of paying off debts early (both our cars are under 5 years old). Regularly save 25%+ of income as well. HHI is 240k.