Refinance - ARM? Thoughts....

[Murlo26]

yea the whole closing cost deal is also an issue, as that is like 4k everytime you do it.

Right now I owe 200k and I think the house is worth 240-250k (250k once I clean it up a bit, yard and paint stuff).

So I am closing in on the 80% deal.

[93gtpeater]

I would go with a fixed rate. I would hate to have the interests rates jump back up and have to pay 9% on your loan. 3% is awesome but if your locked in till you pay off the loan. Do you plan on paying off the house early?


Didn't the housing market go belly up because of the flex rate loans?

[Halon]

Talking with my mortgage guy the lowest you can get now is low 4% region.


4% is still insanely low. Ask your parents what their first home loan looked like, I bet they'd say something like 20-30%.

I would not trade a fixed 5% range loan for a ARM that temporarily gets you 3%. Like someone else said, you have no idea what will happen. I planned to not own my townhouse anymore, but guess what the market crashed and I went upside down on it, so couldn't sell it and just rent it out now. It'd really suck if every year my interest could be increased on me.

[asshanson]

A lot of ARM loans will have a 2% lifetime max, and an annual 1% cap or so. Also, a lot of 30yr fixed are 4.5% now, rates jumped last couple weeks. I am considering a 10/1 ARM if fixed rates dont come down in a month or so.

[93gtpeater]

If you got a ARM lock in for 3-4% for ten years you should do that. You could easily pay off your house in 10 years. Only if you stop blowing money on evo. Murlo stick with a fixed rate.

Question about the ARM. If you lock in at 3% for 5 years. After 5 years it COULD go up by 2% every year. Is their a cap on how much it can go up? 5yr 3% 6yr 5% 7yr 7% 8yr 9%. Can it keep going?

[Halon]

A lot of ARM loans will have a 2% lifetime max, and an annual 1% cap or so. Also, a lot of 30yr fixed are 4.5% now, rates jumped last couple weeks. I am considering a 10/1 ARM if fixed rates dont come down in a month or so.


Why, because 4.5% is some sort of outrageous percentage? 5 years ago you'd be lucky to even get 6% on a 30 year loan. Take a look at this graph, and see where we're at. You can still get rates in the 4% range, do you understand how rare that is historically speaking? Yeah rates have gone up a tish, oh well you didn't get in at rock bottom, but you're still getting in damn close to it.

http://thewestchesterview.com/files/2011/09/40-Years-of-Mortgage-Interest-Rates.jpg


As for your question Paul, that's exactly why I asked if there's a max. Usually they will have a max (say 10%) that once you reach that they can't go any higher. Also there is usually some sort of margin percent as well. So say you have a 5/1 ARM that you locked in at 3%. The max can never exceed a total of 10%, and the margin is 1.5%. Your 5 year mark comes up, time to adjust your loan. Say interest rates at that time are now 5%. The 1.5% margin means they can adjust your loan as high as they want, as long as it's with in 1.5% of current interest rates. So this means they can adjust it to 6.5% (5 + 1.5). However since you have 2% cap on increases, they can only increase you to 5%, and they will more than likely.
Now the next year interest rates have stayed exactly the same at 5%. Well guess what, not for you because they can now up your rate to 6.5% because you're still within that 1.5% margin, and they didn't exceed the 2% change cap. Then say the next year rates to up to 6%, they can bump you up to 7.5%.

[93gtpeater]

Thanks halon.

[niterydr]

If you go with an ARM you should understand the max cap and the max movement per year. If you are planning on moving in 5 years it may make sense. Our first townhome we did an ARM (2009) as we planned on moving in 5 years (Moved in 2013) and I knew the rates were going to stay low as we were still sliding down when we closed.

Fast forward to this summer, had an opportunity to "arm up" again with our new house or go fixed 30 year. Ended up locking a 3.75 (rates jumped up .5 the week before closing :( ) fixed 30 year. Why? The Fed can't keep it this low forever, eventually the rates will equalize to be where they should be to support this type of economy, my guess 6-8% or more.

Money is cheap right now, lock in with what you can. I bet 5 years from now we won't be anywhere near this rate for car loans, home loans, etc.

Unless you can get a movement guarantee of closer to 1% with a ceiling of probably 5-6%, I wouldn't do it in this current economic environment.

If you have a drop of $300 a month, and you said $4000 in closing costs, your break even is 13 months, so its not a bad move. I would personally lock a little higher, say 4% fixed 30 year, swallow a $200 a month profit and break even in 20 months as you said you are moving in around 5 years (not 2 years).

**rough calculations, not going into an amort table this late in the night.

[curt_gendron]

For our new house I locked in back in the first week of May. We are doing a 10 year ARM and taking the risk. We locked at an insanely low 2.5%. I plan to pay a little extra each month. So even if the rates are higher in 10 years, maybe I can lock in a 15 year loan for a reasonable rate. I have a feeling we aren't going to see 7 or 8% interest rates again. My mortgage would be capped at 7.5%.

later,
Curt

[JET]

I would do a conventional 15 year if you can, 30 if you can't. In 5 years when you have to refinance the rates WILL be much higher than they are now. Even 4.5% they are at right now is crazy low, as Brandon showed.