5/1 ARM: Lifetime cap, First Adjustment Cap, Margin, and Annual Cap?
"I hope this image is clear. A spreadsheet is how I look at these things. Unfortunately, you didn't offer the starting balance so I use $100K which makes it easy to scale. You build a simple spreadsheet and enter the ""what if"" scenario, this tells me that worse case, an increase of 1% on the rate each year results in a near 60% increase in payments over the 10 years.  Of course, this isn't the end of the story, I'd first change the payments to reflect the 5% rate, and see how much that drives the balance down. This would reduce the principal enough that the increase would be much less. On $100K, you'd pay $536.82 based on a 5% rate, regardless of the required payment. At 7.75% the payment is $563.11, not even 5% higher.  If you'd like a spreadsheet started for you, I'll put it someplace for you to grab it." You quote a rate (2.75%) and then quote a margin (1.75%).  The margin is usually an addition to some base rate.  How is the margin expressed in the figures you have?  Is it included in the rate, or in addition to it? As for the other stuff, it looks like the rate can go up at most 1% per year, up to a maximum of 5% increase.  The first adjustment cap is also 1%.  That just says that your first rate increase is capped the same as subsequent increases. If the margin is already included, and the increases are based on your initial rate, then this puts you at a maximum of 7.75%. You must verify this.  I don't have your loan documents. And again, why would you want to risk an increase at all?  You have a decent fixed-rate mortgage already.  That still doesn't make sense to me.  Going from 2.75% to 7.75% as above can increase your monthly payment by over 40%. "Interest rates are at a record low and the government is printing money. You can get a fixed rate loan at a rate equal to inflation in a healthy economy. Unless you know that you are moving in < 5 years, why would you expose yourself to interest rate risk when rates are about as close to zero as they can be? If your thought with respect to mitigating interest rate risk is: ""What's the big deal, I'll just refinance!"", think again, because in a market where rates are climbing, you may not be able to affordably refinance at the LTV that you'll have in 5-7 years.  From 1974-1991, 30 year mortgages never fell below 9%, and were over 12% from 1979 to 1985. Think about what those kinds of rates -- which reduce a new homeowner's buying power by over 40%, would do to your homes value." If the base rate is USD LIBOR, you can compute this data directly on my website, which uses futures contracts and historical data to create interest rates scenarios for the calculations: http://www.mortgagecalculator3.com/ If your rate index is different, you can still create your own scenarios and check what would happen to your payments.
It's tough to borrow fixed and invest risk free. That said, there are still some interesting investment opportunities. A 4% loan will cost you 3% or less after tax, and the DVY (Dow high yielders) is at 3.36% but at a 15% favored rate, you net 2.76% if my math is right. So for .5%, you get the fruits of the potential rise in dividends as well as any cap gains. Is this failsafe? No. But I believe that long term, say 10 years or more, the risk is minimal. Disclaimer: I’m not an expert.  This is my basic understanding, which I’m sure someone will be glad to tell is horribly wrong...  You need an LLC.  Many people in my area create an LLC management company, then create individual LLCs for each investment property.  Laws vary by state.  YMMV  Then you start researching properties.  Commercial loans typically require a higher equity position than home ownership.   Assume minimum 30%.  For ease of this conversation let’s say you’re making the horribly poor decision to put that towards a single property.   You’d be looking for a property in the 175-200k value range, because you’ll need to account for settlement expenses (attorney, broker, consultants) and a cash reserve.  You’d be also be looking for what the average cap rate is for your market.  In simplistic terms cap rate is the expected rate of return after expenses.  So if the average market cap rate in that region for comparable properties is 5%, you can expect around 5% return on your investment, after you pay fees, maintenance, taxes, insurance, interest, etc.  Buy a property and hold that property for a few years, making money every year, and claiming deductions on your earnings for something called depreciation.  Fast forward 5 years and you’re ready to sell, the value of your property went up because you made improvements along the way, brought in some better tenants who are paying higher rents, and now you can offer a better cap rate than your competitors.  You sell in the blink of an eye, and double your investment.  Say you have $500k now sitting in the bank in you LLC’s name, in cash.  You can either choose to cash out 100% and pay capital gains tax on your earnings above your basis (at 15% I think?)... OR you can quickly find a new property with that $500k, purchase it, and file a 1031, which says you don’t have to pay ANY capital gains on those earnings.  You just increased income significantly without ever paying taxes on the underlying increase in value of your assets.  Rinse and repeat for 25 years, develop a portfolio of properties, create a management company so you can stop paying others a percentage of your earnings, and you too can have the problem of too much money.  I welcome anyone with actual knowledge of the topic to please expound on, or correct me. You can get really nerdy with the EV calc, but I would just add that it's important to deduct any non-operating, non-consolidated assets in addition to the minority interest adjustment - e.g. unconsolidated subsidiaries, excess real estate, excess working capital, etc. Go to bankrate dot com. They will have a lot of metrics there that might give you an idea and rate each category. Capitalization and profitability metrics. May not be as granular as what you are looking for though. "I don't think you have your head in the right space - you seem to be thinking of these lifecycle funds like they're an annuity or a pension, but they're not. They're an investment. Specifically, they're a mutual fund that will invest in a collection of other mutual funds, which in turn invest in stock and bonds. Stocks go up, and stocks go down. Bonds go up, and bonds go down. How much you'll have in this fund next year is unknowable, much less 32 years from now. What you can know, is that saving regularly over the next 32 years and investing it in a reasonable, and diversified way in a tax sheltered account like that Roth will mean you have a nice chunk of change sitting there when you retire. The lifecycle funds exist to help you with that ""reasonable"" and ""diversified"" bit.They're meant to be one stop shopping for a retirement portfolio. They put your money into a diversified portfolio, then ""age"" the portfolio allocations over time to make it go from a high risk, (potentially) high reward allocation now to a lower risk, lower reward portfolio as you approach retirement. The idea is is that you want to shoot for making lots of money now, but when you're older, you want to focus more on keeping the money you have. Incidentally, kudos for getting into seriously saving for retirement when you're young. One of the biggest positive effects you can have on how much you retire with is simply time. The more time your money can sit there, the better. At 26, if you're putting away 10 percent into a Roth, you're doing just fine. If that 5k is more than 10 percent, you'll do better than fine. (That's a rule of thumb, but it's based on a lot of things I've read where people have gamed out various scenarios, as well as my own, cruder calculations I've done in the past)" As these all seem to be US Equity, just getting one broad based US Equity index might offer similar diversification at lower cost. Over 5 years, 20 basis points in fees will only make about 1% difference. However, for longer periods (retirement saving), it is worth it to aim for the lowest fees. For further diversification, you might want to consider other asset classes, such as foreign equity, fixed income, etc. This sounds a lot like an Equity-indexed Annuity.  They date from about 1996 (there is a bit of skepticism about them, as they are tricky to understand for the typical investor).  For instance, an equity indexed annuity pays a portion of the gain in an index (like S&P 500) when the stock market rises, and guarantees you won't lose if it falls.  In an arbitrage sense, it is roughly equivalent to buying a mixture of bonds and index (call) options. There are a lot of complicated 'tweaks' on these, such as annual ratchet/annual reset, interest caps, etc. There is quite a bit of debate about whether they are too good to be true, so I'd read a few articles with pros and cons before buying one. These are also commonly called FIA (Fixed indexed annuities). John Bogle never said only buy the S&P 500 or any single index Q:Do you think the average person could safely invest for retirement and   other goals without expert advice -- just by indexing? A: Yes, there is a rule of thumb I add to that. You should start out   heavily invested in equities. Hold some bond index funds as well as   stock index funds. By the time you get closer to retirement or into   your retirement, you should have a significant position in bond index   funds as well as stock index funds. As we get older, we have less time   to recoup. We have more money to protect and our nervousness increases   with age. We get a little bit worried about that nest egg when it's   large and we have little time to recoup it, so we pay too much   attention to the fluctuations in the market, which in the long run   mean nothing. How much to pay Q: What's the highest expense ratio that one should pay for a   domestic equity fund? A: I'd say three-quarters of 1 percent maybe.   Q: For an international fund?  A: I'd say three-quarters of 1 percent.   Q: For a bond fund? A: One-half of 1 percent. But I'd shave that a little bit. For   example, if you can buy a no-load bond fund or a no-load stock fund,   you can afford a little more expense ratio, because you're not paying   any commission. You've eliminated cost No. 2.... "This type of structured product is called a capital protection product.  It's like an insurance product - where you give up some upside for protection against losses in certain cases.   From the bank's perspective they take your investment, treat it as an ""interest-free loan"" and buy derivatives (like options) that give them an expected return greater then  They make their money: With this product, you are giving up some potential upside in order to protect against losses (other than catastrophic losses if the lower index drops by 50% or more).   What's the catch? There's not really a catch. It's a lot like insurance, you might come out ahead (e.g. if the market goes down less than 50%), but you might also give up some upside.  The bank will sell enough of these in various flavors to reduce their risk overall (losses in your product will be covered by gains in another). Note that this product won't necessarily sell for $1,000. You might have to pay $1,100 (or $1,005, or whatever the bank can get people to buy them for) for each note whenever it's released.  That's where the gain or loss comes into play.  If you pay $1,100 but only get $1,000 back because the index didn't go up (or went down) you'd have a net loss of $100. It's subtle, but it is in the prospectus: The estimated value of the notes is only an estimate determined by reference to several factors.  The original issue price of the notes will    exceed the estimated value of the notes because costs associated with selling, structuring and hedging the notes are included in the original issue price of the notes.  These costs include the selling commissions, the projected profits, if any, that our affiliates expect to realize for assuming risks inherent in hedging our obligations under the notes and the estimated cost of hedging our obligations under the notes." "5-8 years is not quite long term.  Until the naughts (the 2001-10 decade), advisors were known to say that the S&P was always positive given a 10 year holding period. Now, we're saying 15 years is always positive looking back.  One can easily pull S&P return data which would let you run numbers showing the range of returns for the 5-8 yr period you have in mind. A bit of extra effort and you can include the dollar cost averaging factor.  This wouldn't produce a guarantee, but a statistical range of expected returns over your time horizon. Then a decision like ""with a 1/4 chance of losing 25% of my money, should I stay with this plan?"" This is just an example. The numbers for 1900-2014 look like this -  In any 5 year period, an average return of 69.2% (note 1.69 means a 69% gain). Of the 111 5 year periods, 14 were negative with the worst being a 46% loss. I maintain 5 years is not really long term, but the risk is relatively low of being in the red." The fundamental issue with leverage (of any sort, really) is that the amplified downsides are extremely likely to more than cancel out amplified equivalent upsides. Example without using a major swing: 2x leverage on a 5% decline (so a 10% decline).  The 5% decline needs a 5.26% increase to get back level.  However, the 2x leverage needs an 5.55% increase to get back.  So a cycle for the unleveraged returns of -5%, +5.4% would see the unleveraged asset go up by a net +0.13% but 2x leverage would leave you at -0.28%.  Conversely, imagine 0.5x leverage (it's easy to do that: 50% cash allocation): after an underlying -5%, the 0.5x leverage needs only +5.13% to reach par.  This is basically the argument for low volatility funds. Of course, if you can leverage an asset that doesn't go down, then the leverage is great.  And for an asset with an overall positive compound return, a little leverage is probably not going to hurt, simply because there are likely to be enough upsides to cancel out downsides. Line one shows your 1M, a return with a given rate, and year end withdrawal starting at 25,000.  So Line 2 starts with that balance, applies the rate again, and shows the higher withdrawal, by 3%/yr.  In Column one, I show the cumulative effect of the 3% inflation, and the last number in this column is the final balance (903K) but divided by the cumulative inflation.  To summarize - if you simply get the return of inflation, and start by spending just that amount, you'll find that after 20 years, you have half your real value.  The 1.029 is a trial and error method, as I don't know how a finance calculator would handle such a payment flow. I can load the sheet somewhere if you'd like.  Note: This is not exactly what the OP was looking for. If the concept is useful, I'll let it stand. If not, downvotes are welcome and I'll delete. "A good question -- there are many good tactical points in other answers but I wanted to emphasize two strategic points to think about in your ""5-year plan"", both of which involve around diversification: Expense allocation: You have several potential expenses. Actually, expenses isn't the right word, it's more like ""applications"". Think of the money you have as a resource that you can ""pour"" (because money has liquidity!) into multiple ""buckets"" depending on time horizon and risk tolerance. An ultra-short-term cushion for extreme emergencies -- e.g.  things go really wrong -- this should be something you can access at a moment's notice from a bank account. For example, your car has been towed and they need cash. A short-term cushion for emergencies -- something bad happens and you need the money in a few days or weeks. (A CD ladder is good for this -- it pays better interest and you can get the money out quick with a minimal penalty.) A long-term savings cushion -- you might want to make a down payment on a house or a car, but you know it's some years off. For this, an investment account is good; there are quite a few index funds out there which have very low expenses and will get you a better return than CDs / savings account, with some risk tolerance. Retirement savings -- $1 now can be worth a huge amount of money to you in 40 years if you invest it wisely. Here's where the IRA (or 401K if you get a job) comes in. You need to put these in this order of priority. Put enough money in your short-term cushions to be 99% confident you have enough. Then with the remainder, put most of it in an investment account but some of it in a retirement account. The thing to realize is that you need to make the retirement account off-limits, so you don't want to put too much money there, but the earlier you can get started in a retirement account, the better. I'm 38, and I started both an investment and a retirement account at age 24. They're now to the point where I save more income, on average, from the returns in my investments, than I can save from my salary. But I wish I had started a few years earlier. Income: You need to come up with some idea of what your range of net income (after living expenses) is likely to be over the next five years, so that you can make decisions about your savings allocation. Are you in good health or bad? Are you single or do you have a family? Are you working towards law school or medical school, and need to borrow money? Are you planning on getting a job with a dependable salary, or do you plan on being self-employed, where there is more uncertainty in your income? These are all factors that will help you decide how important short-term and long term savings are to your 5-year plan. In short, there is no one place you should put your money. But be smart about it and you'll give yourself a good head start in your personal finances. Good luck!" Im creating a 5-year projection on Profit and loss, cash flow and balance sheet and i\m suppose to use the LIBOR (5 year forward curve) as interest rate on debt.  This is the information i am given and it in USD.  Thanks for the link.  I guess its the USD LIBOR today, in one year, in two years, three years, four years and five years I need to see the policy you are referring to give a more accurate answer. However what could be happening, it’s again the way these instruments are structured; For example if the insurance premium is say 11,000 of which 1000 is toward expenses and Term insurance amount. The Balance 10,000 is invested in growth. The promise is that this will grow max of 9.5% and never below zero. IE say if we are talking only about a year, you can get anything between 10,000 to 10,950.  The S & P long-term average return is in the range of 12 -15% [i don't remember correctly] So the company by capping it at 9.5% is on average basis making a profit of 2.5% to 5.5%. IE in a good year say the S & P return is around 18%, the company has pocketed close to 9% more money;   On a bad year say the Index gave a -ve return of say 5% ... The Insurance company would take this loss out of the good years. If say when your policy at the S & P for that year has given poor returns, you would automatically get less returns.  Typically one enters into Life Insurance on a long term horizon and hence the long term averages should be used as a better reference, and going by that, one would make more money just by investing this in an Index directly. As you whether you want to invest in such a scheme, should be your judgment, in my opinion I prefer to stay away from things that are not transparent.