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5/1 ARM Refinance..To Do or Not to Do

Please give me the Pros and Cons of 5/1 ARM Refinance

These are some reasons why I might do it:
Potentially Lessen mortgage payment by 90 to 100/month
Better Interest rate around 3.675 to 3.75, no origination points
Wanting to move between 1 to 3yrs if possible (better area schools & bigger home)
Paying down principal a little quicker so that we can be less 'upside' down on our current home (hopefully be able to sell)
Can only adjust 1% after 5 years (still under current interest rate of 5.25)

Reasons I may not do it:
it's an ARM...period
It assumes that we will be still 'qualifiable' for a loan if we stay longer than intended
MIP (mortgage insurance may increase by 90/mo)
Uncertainty that it could only adjust by 1% 
Ability to re-finance again at the end of 5 yrs
did i mention it's an ARM?  just uncertainty... 
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July 13 2011 - US
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Answers (6)

Deborah is right. Do the math. Getting a loan is not free.

Happy funding, Rudi
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July 14 2011
Given the pros and cons you have listed I am at a loss as to why you would consider refinancing at all.  Though refinancing costs vary dramatically from state to state, none are "cheap" and the only short term refinance that makes any sense at all is a "no cost" loan.  By "no cost" I mean no money from you and no money being added to your principal balance of the loan.

Additionally, I would want to see the ARM disclosure indicating the adjustment of only 1% at the end of the 5 years.  Most 5/1 arms have a 5/2/5 cap structure.  I have seen a 2/5...but not a 1% cap.

If the current market has not convinced people to stop considering a "refi now with a promise of a refi later" I don't know what could.  Lastly, switching a lower loan payment for higher MI is just nonsensical.

Sounds to me like the only winner on this scenario is the loan consultant.  I thought (hoped) all the flakes were out of the mortgage industry by now.
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July 14 2011
Profile picture for SoCal_Engr
"Potentially Lessen mortgage payment by 90 to 100/month"

"MIP (mortgage insurance may increase by 90/mo)"

Is it just me, or does that sound like refinancing for $0-$10 a month in cash flow. And moving in 1-3 years? If the refi costs more than $120-$360, you'll lose money in the process.

Suggestion...

Don't do the refi. Take any money you might have spent no the refi, and set it aside to help when you decide to move.
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July 13 2011
Refinances cost thousands to complete.  With a 1-3 year move out window and saving $100 a month, you will barely break even.

Save the money to be able to purchase when you move.
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July 13 2011
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An arm demands 2 things to make sense.

1 high interest rates. We do not have those now.

2 house prices not dropping lower.

Peter Schiff: Here's Why Home Prices Have To Decline At Least 20% And Probably More

If you go to refinance in a new environment where rates are 9% or much higher you will be in trouble. If your house loses value and you can not refinance you will have to pay the higher adjusted rate with no options. Many live that way today. They pay more than they want but refinancing is impossible.

Go with a fixed rate loan. I makes more economic sense and is safer.
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July 13 2011
Hello,

Refinancing into an ARM for someone who has a solid plan is great if the loan program works for them, if you are sure you will be moving out of that house in 1-3 years (less than 5 years) and you want to sell the house, then it is a great way to save money. Depending on your loan amount and fico score and loan to value, interest rate of 3.75 is a little high for a 5/1 ARM in my opinion. Please feel free to call us for more information.
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July 13 2011
 
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