patrick.net

Not enough information. Likely years of ownership, amount borrowed, closing costs, how badly is the market declining.
My mortgage rate in 1980 was 13%.
4.875% for 30 years is a historically fabulous rate. 3.875% is obviously better, but year 6 is an unknown both for interest rates and home values. People who bought in 2006 cannot refinance now.

Depends on the rate caps, both overall and yearly. On a 5/1 ARM with BOA, the rate caps are 1% yearly and 5% lifetime. In this scenario, I tested what would happen compared to the 30 year fixed:

My test included taking the 5/1 and paying what the 30 year fixed would be, thereby paying down principal. With those caps in place, the payment NEVER was higher than the 30 year fixed would have been, and if you pay the amount the 30 year fixed would have been you pay it off about seven years early...if that makes sense. Since you have 5 years to retire a great deal of principal at a lower rate, you dont run the risk of having a higher payment down the line because in effect, you have seven years of the same interest rate or lower. (six in your example)

The spread was greater for the test I ran though. 1% is probably not worth it. I am looking at 1.75% spread between 5/1 ARM and 30 year fixed.

At 1% spread if your arm adjusts to the highest rate possible, 8.875 from 3.875 it will cost you more money vs a fixed rate. Basically it is a gamble of how high do you think interest rates will go.

With these numbers, I will take 4.875.

Like others said, 3.875 for 5 year ARM is not a good deal.

Why in the world aren't you thinking 15 year at 3.95?

cloud13 says

I’m more inclining towards ARM because in computer science there used to be a class of algorithms “Greedy Algorithms”.
The theory was that most of the times locally optimal solutions prove to be Globally optimal.

What is your take on it ?

My take on it is that you have to read the f**king document. Not all ARMs are the same; you have to read how your rate will be calculated, by what index, and with what cap. One of my first jobs was temping at a major mortgage loan company and had to explain all this to angry customers who didn't understand why their loans only ever seemed to adjust up, never down.

Thank you friends.
I finally went with 4.375 buying down the interest rate with 2.25 points. I went with this reasoning because paying these extra points is tax deductible anway and I'll break even in next 4 years after facotoring in tax advantage.