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Refinancing a ARM 5/1 at year 4.5

Discussion in 'Finance and Investment' started by MedicationWorks, Mar 25, 2007.

  1. MedicationWorks

    MedicationWorks Senior Member

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    Hi, this might be a silly question, but what if I don't want a variable rate after year 5 on my ARM 5/1 so I refinance my mortgage to a fixed rate 30 year at year 4.5. Would doing this really hit me? For example any principle I paid off during the 4.5 years be gone. Or, is this possible to do without losing a significant amount of money? Thanks.
     
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  3. TommyGunn04

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    I don't know too much about refinancing, but my understanding is that there are typically "closing costs" associated with re-financing, similar to when you buy your home. Whether or not it's worthwhile for you to refinance may ultimately depend on how much longer you plan to stay in the house, how much you'd have to pay upfront for the refinancing, and how much it would save you in the long run. If you're only going to be there for another year or two, make sure you run the numbers carefully. Even if your interest rate is about to increase on your ARM, it still may not be worth the cash to refinance, because of the upfront costs typically associated with the re-fi. There are some "no closing cost" options out there, but they're typically associated with a higher interest rate. What's your current interest rate on the loan? What will it rise to after the 5 years? What will be the change in your monthly payment?

    There's some useful info on this at the website of my favorite radio personality, Clark Howard: http://clarkhoward.com/shownotes/category/4/125/135/394/
     
  4. Jocomama

    Jocomama Make 'em bleed!

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    This is more common than not. Most 5/1 ARMs (Adjustable Rate Mortgages) are 30 yr mortgages, fixed at a low rate for the "5"yrs then adjust up one time every year. The problem is most are on a 5-2-5 scale or cap. It used to always be 2-5, until, about 7 yrs ago.
    The first digit is how much it can adjust for the first time. So, if your rate is 4.75%, and the margin (fixed rate above the "floating" core) is 2.25%, then you add the core plus margin.
    Most 5/1 arms are based on the LIBOR (London Interbank offered Rate), where was they used to be based upon the US Treasury.
    http://www.moneycafe.com/library/libor.htm
    So if you adjusted today, your rate would be 7.583 for the next 12 months.
    This is not bad; only 2.8% above your 5yr initial rate. If 1 yr libor was at 7%, you could end up with a 7 + 2.25 margin = 9.25% rate. But if Libor was at 8%, you would NOT end up at 10.25%, because the cap (5-2-5) keeps your first adjustment at 5 above your base rate. Then each year after, no matter what the LIBOR, your rate can only go up or down by 2% max from the previous year. And the third number is the lifetime cap. So no matter what, your rate can never exceed 9.75% even if other people are at 15%.

    Right now, 30yr fixed loans are in the low 6%. If you are staying in your house for another 5 yrs, then by all means, refinance. Yes, you pay the basic "hard costs" of Appraisal, Bank fees and Title fees. The other costs are moot; taxes and insurance escrow (because you still pay taxes and insurance regardless of refinance).

    If you have more detailed questions, send me PM


     

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