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Refinance to an ARM?
Old 12-30-2014, 02:19 PM   #1
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Refinance to an ARM?

Hello all,

I closed on a condo in April of this year. Since it is a condo (and rates are a tad higher on condo mortgages), I closed with a 4.5% fixed 30 year mortgage.

My mortgage broker at the time asked if I was interested in a 5/1 or 7/1 ARM given that my condo is small (1 bedroom) and I am young (25) and therefore may not be there more than 5 or 7 years.

At the time, I brushed that off and viewed this as a long term hold. Don't get me wrong, I don't regret my purchase, but my condo is small (900 sq feet) and I can't see myself living with anyone else (i.e., future SO) in the place since it is so small. If we did share the unit, I'd prefer it to be only for a short time.

Given that I don't want to be/plan to be single my entire life, I may move in the future. I have not yet talked to my mortgage banker, but a "back of the envelope" test shows that I can save $100-$150 a month on my mortgage by going the ARM route.

Based on my mortgage of about $167K, and a conservative 3.5% rate for a 5/1 ARM vs my current 4.5% rate, the difference is about $100 a month. I think I could even get a lower rate, but not sure (just used 3.5% because bankrate.com shows the avg 5/1 ARM to be 3.28% today).

What do you think? I am not sure of what the closing costs would be, but a $1,200 yearly savings sounds enticing. If the closing costs are cheap, I could potentially just pay them out of my current (albeit small) equity I've built up since the spring.
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Old 12-30-2014, 02:44 PM   #2
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In five years, you will have saved ~$6K. It costs you some closing costs, today, to do that. Likely $2K or more. It's a NPV question. And you will likely extend the term.

The risk is that you stay significantly longer, and have to eat a much higher interest rate. Or the rate bumps a lot.

4.5% is not bad. Stick with it. You may use it as a rental when you move.
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Old 12-30-2014, 02:49 PM   #3
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It's a small difference in rates, but a large difference in risk. No one can tell when rates will rise, but a quick rise in the next few years could put your ARM rate above the 4.5% you enjoy now. To decide, you'll need to consider alternative scenarios. Do you intend to pay of the mortgage early? Would you keep the condo with a mortgage as a rental if you move out? How much would a refinance cost compared to how much you might save for how long?
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Old 12-30-2014, 03:49 PM   #4
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Is there a potential SO in the picture right now? If you're not serious with anyone yet, and given that it should take at least a couple of years to get to that level given the high stakes, the potential savings diminishes.

Being conservative I'd stick with what you have now. And as Senator mentioned the numbers may make it work out well as a rental then and you'll be happy to have the 4.5% rate.
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Old 12-30-2014, 07:13 PM   #5
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I'd check out PenFed 5/5 ARM. Current rate is 2.875%, it resets a max of 2% after 5 years. So after 5 year it could go up to 4.875 which is only marginally higher than your current rate.
It sounds like 10 years is as long as you plan on living there so I'd definitely look at refinancing.
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Old 12-30-2014, 07:24 PM   #6
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Originally Posted by growing_older View Post
It's a small difference in rates, but a large difference in risk. No one can tell when rates will rise, but a quick rise in the next few years could put your ARM rate above the 4.5% you enjoy now. To decide, you'll need to consider alternative scenarios. Do you intend to pay of the mortgage early? Would you keep the condo with a mortgage as a rental if you move out? How much would a refinance cost compared to how much you might save for how long?

I would normally say the same.... but since he was looking at a 5 year fixed rate it is probably not that big of an issue... he also will probably sell before it gets out of hand...
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Old 01-01-2015, 02:05 PM   #7
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In times of low interest rates, you take the current fixed rate financing. In times of very high interest rates, you go the ARM.

You should check in to seeing what the payoff is by paying extra on the principal monthly--if you can cut it.

A paid for house/condo would be a very great thing for someone that's young.
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