So a friend of mine is buying a house (happy for him), but he is opting for a 7/1 ARM @ 3.125 APR. 30 year fixed is costing him 3.875 APR. Is he making a mistake? Sure, who knows what happens in 7 years, but my feeling is 3.875% is low enough to lock in for 30 years and not worry about it. If the rates fall, refinance. If not, 3.875% is a solid rate historically. But the risk I see with a 7/1 ARM is if the rates go up to say even 4.5%, he ends up paying a lot more in interest. Also, he doesn't plan to payoff mortgage in 7 years.
Is he making a bad financial decision? Am I missing something? Which one would you pick?