Refinance - ARM? Thoughts....

[Murlo26]

So talking with my mortgage guy he is pushing me toward an ARM and I can get a rate of around 3% for 5 years and he said it has a cap of 2%. He says he has been doing ARM's for the past 12 years and the average is way ahead of if he would've done a fixed rate.

Anyone have any experience in this? This is a friend of the family too so not a stranger but it seems like a no brainer the way he is setting it up.

My mortgage will drop almost 300/mo if this goes through.

[Halon]

Interest rates are at record lows. They have come up a little in the past few months but still are ridiculously low in the grand scheme of things. I'm not financial genius, but I don't know why anyone would get an ARM right now? We locked in at 3.625% for a 30yr on our house.

From the sounds of the one you are talking about, you'd be locked in at 3% for 5 years. Then after 5 years, the way I believe that cap % number is that is the max it's allowed to change every year. So worst case scenario you could end up at 5% at year 6, 7% at year 7, 9% at year 8 (you've tripled your interest rate at this point), etc. Will it change that max cap amount every year, probably not. But that's the thing with an ARM, you really have no idea and no control over what happens after the fixed period is over.

If you're OK with that, then sure I guess go for it. I know I personally won't go anywhere near an ARM.

Do you know what the highest rate the mortgage can ever reach over the life of the loan? Also, do you know what the margin percentage is?

[Knoxville]

Never have I ever been interested in an ARM. My brother had an ARM on his first mortgage and the minute they could increase the rate, they did increase the rate big time. He refinanced that very week and got locked into a fixed rate.

I concur with Halon, rates are virtually as low as we'll ever see them in our lifetime, lock it up while you can.

[A//// Guy]

ARM is bad.

[Murlo26]

Originally Posted by Knoxville

Never have I ever been interested in an ARM. My brother had an ARM on his first mortgage and the minute they could increase the rate, they did increase the rate big time. He refinanced that very week and got locked into a fixed rate.

I concur with Halon, rates are virtually as low as we'll ever see them in our lifetime, lock it up while you can.

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

Basically he said at year 5 I would want to refinance. Basically he said if you are planning on staying in your home for 10 years or more do fixed otherwise if you plan to move, relocate, buy bigger house etc this makes a lot more sense. The average mortgage only lasts 4.5 years is what he was saying so for many people it makes sense for the above reasons and mortgages never last the full 30 years so why pay the higher rates type of deal.

He said with the lower rate you then pay more towards principal with what you save and in the end you come out quite a bit ahead.

I am not for it or against it, but this guy is a mortgage specialist and has been for many many years and has his own financial business. Basically he knows more about finance than I would ever want to know so its hard to not listen to what he says to at least some extent.

We will see. I would typically agree with you guys, and get the low rate locked in forever but this might make sense. I am going to do some more digging on what possible downsides there are but I feel like this is a bit like the whole leasing talk I started haha But maybe a bit more practical.

But yes Halon, that is how I understood it, 3% then after 5 it can go to 5% at worst and he said at that point I would look into moving, refinance etc.

[Murlo26]

Originally Posted by A//// Guy

ARM is bad.

Care to elaborate.

I am bored at work so I started the topic but just saying it is bad with nothing to back it up doesn't help the cause.

MOAR details please

I always assumed this was bad too but like I said, they wouldn't have something exist if it never made sense unless its for suckers type of deal, who knows.

I still plan to do a fixed rate but I want to look at options if they make sense. Maybe this doesn't but i don't just want to ignore it because I don't understand it.

[Knoxville]

Originally Posted by Murlo26

Basically he said at year 5 I would want to refinance.

To me this is like gambling in some ways. To many variables could change within the 5 years. For example, lets say housing market goes under even further and your upside down on your house. Refinance will not be possible without an appraisal and such (unless something like FHA streamline comes out)

Also, if interest rates are almost at an all time low right now, they are probably only going in one direction (up). So when you refinance in that 5 years when they bump your ARM up, you're at the mercy of the current rates.

Lots of variables come into place with ARM versus fixed. Just my .02 cents

[A//// Guy]

Because of what Brandon said, it can rise every year that max 2%. I dont see a huge increase in rates in the coming year or so, but even this year they jumped a percent or so.

What rate are you at right now? You cant bring it down to 4.5 or so @ 20 or 25 years?

[Legolas337]

everytime you refinance you spend closing costs, so if in 5 years again you refinance your spending more money to close on the loan. So even though rates for a fixed are at ~4% I would say stick with that. In 5 years they probably wont be that low and might even be around 7%. lock in at the fixed rate and start paying down the principal, the faster you get that down below 80% of initial loan value you can drop mortgage insurance and get out of escrow, which both cost you more.

I had everything figured out that if me and the wife could pay an extra 600$ towards debt a month we could have everything including the house paid off in just over 6 years. just my 2 cents

[Murlo26]

Originally Posted by Halon

Interest rates are at record lows. They have come up a little in the past few months but still are ridiculously low in the grand scheme of things. I'm not financial genius, but I don't know why anyone would get an ARM right now? We locked in at 3.625% for a 30yr on our house.

From the sounds of the one you are talking about, you'd be locked in at 3% for 5 years. Then after 5 years, the way I believe that cap % number is that is the max it's allowed to change every year. So worst case scenario you could end up at 5% at year 6, 7% at year 7, 9% at year 8 (you've tripled your interest rate at this point), etc. Will it change that max cap amount every year, probably not. But that's the thing with an ARM, you really have no idea and no control over what happens after the fixed period is over.

If you're OK with that, then sure I guess go for it. I know I personally won't go anywhere near an ARM.

Do you know what the highest rate the mortgage can ever reach over the life of the loan? Also, do you know what the margin percentage is?

not sure, just spoke with my mortgage adviser this afternoon and haven't gotten into the details.

he is still running initial number calculations right now and hasn't gotten to the fine details.

My big problem is I have a second mortgage, well my name is tied to one, with my dad that is on a 300k condo so my debt/income always sucks so this was one way that my guy said we might be able to pull of the refinance was to get the rate that much lower.

The condo I just co-signed and we have renters that my dad takes care of and its up for sale now so hopefully i come off that soon and I don't have to worry about it but for now I am trying to refinance before the rates go up anymore. I am at like 5.5 or 5.75 right now so anything will be better than that. And in the next year I need to refinance anyway as my current loan is a 5 year balloon mortgage (30 year amortization).

[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]

Originally Posted by Murlo26

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]

Originally Posted by 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.

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.




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.