7 yr ARM refi - I thought it was a good idea and now I dont know!

2 Replies

We have 6 years left on the mortgage of or current home and have been thinking about refinancing since interest rates are currently 1/2 of our mortgage. The plan was to refi with a 7 year ARM and pull out a good amount to set aside to use as a down payment on another home, rent out our current home and let our renter(s) pay it off for us. However, now that we're pre approved and set to begin the process, I'm getting cold feet about spending thousands of dollars in closing costs. Thinking out loud here.... And wondering if we should just sit tight and leave everything as is for another year or two. Does it make sense to go ahead with our plan and refi since we know we'll definitely want to move within the next 2-5 years?

@Denise Lamkin

If you only have 6 years left on your loan, I don't see why you want to refinance it. If you're looking for cash to buy another property, why not apply for a HELOC instead?

If you're looking to lower your monthly payments, then go for a 15/30 year fixed mortgage. Interest rates are low, it's not going to get any lower and will probably go up eventually. 

@Denise Lamkin If you know you're definitely going to move in 5 years, a 7-year ARM can be a great deal because the rates are usually a lot lower than a 30-year fixed, the payments are low, and you'll be out long before the rate starts adjusting.

However, the downside is that you risk a jump in your payment if you stay longer than expected and the closing costs can be higher on such a loan than a comparable 30-year fixed. If you're planning to stay only a few years, the higher closing costs might cancel out the benefits of the much lower rate and payment. 

A good alternative might be a 10/1 ARM. You still get a lower rate than a 30-fixed, and there's enough margin in the deal for the lender to keep your costs lower.

If the closing costs on the 7/1 or 10/1 are prohibitive, it might make sense to just go for a very low cost or no cost 30-year fixed. The rate won't be the lowest available (that's why the costs are low), but if the rate and payment are lower than what you have now, it can make a lot of sense. 

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