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
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.
