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Fixed Rate or ARM?

We purchased our property about 2 years ago using a 30-yr fixed rate FHA loan at 4.25%.  We now have 20% equity in the home and want to refinance to get rid of the dreaded PMI (currently about $600/month). 

Our credit is excellent (above 800, already pulled by banks).  We are looking at 30-year fixed $575k loan quoted at 4.375%.  It essentially would remove the $600 PMI but no other savings.  The 5/1 is being quoted around 3.25%-3.5%, depending upon points.  An ARM would save us about $1000/month.  We really don't plan on staying more than 5 years, but I am apprehensive about doing an ARM due to the uncertainty after 5 years.  Any advice?

  • September 26 2013 - US
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Answers (4)

The previous posts are spot on. I would definitely recommend a 7/1 if you were to make a move to an ARM. It's still a great rate and gives you an extra couple of years of a fixed rate in case you stay in your home a little longer than planned.

  • September 27 2013
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It's difficult for any of us to answer this question because it's a personal decision. It seems you have a grasp on the basic pros and cons of both, so at this point it is all about risk vs. reward and how certain you are that you'll be out of the house in around five years. 

One thing to look at is your worst case scenario for the sixth and seventh years. Your loan will have a first adjustment cap and a periodic adjustment cap, so the highest your rates can be in years 6-7 is already determined. This may help ease an anxiety about the time-frame.

If you though there was a possibility this would be a forever home or you would be there for an extended period of time, rates are still really historically low, so locking it in would be a pretty good idea.

I hope that helps.
  • September 27 2013
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ARM if you plan on leaving. Drop the payment and gain the equity for when you sell.
  • September 26 2013
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You approached this properly.  Think about how long you will be in the home and make a decision based off of your goals.  You may want to take a look at a 7/1 as the rates are comparable and will provide 2 extra years of comfort.  But based off of your explanation, you will be saving $400 additionally per month by choosing a 5/1.  This equates to $24,000 at year 5.  I'd say $24,000 is a pretty decent savings.

Best of luck,

Bryan
  • September 26 2013
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