Profile picture for Deanne_OR

Would an ARM be a good idea?

I'm thinking about refinancing to an ARM. I hear about how they're a bad idea, but is that always the case? My thought is to refi to an 5/1 ARM and continue paying my mortgage off as quickly as possible. If I don't refinance and I continue with my current mortgage, I anticipate having my house paid off in 8-10 years by paying an extra $1300/month on the principle. I'm one year into a 30-year mortgage.

If I refinance to an ARM, and continue paying this much extra on the princple, it looks like I'd be able to pay it off in about 6 years. When the interest rate reset happens in 5 years, it only resets on the remaining balance, correct? So if I only have 30K left on the mortgage, the new payment would continue to be affordable.

Opinions? Advice?

Thank you!
Deanne
  • June 09 2011 - US
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Answers (11)

If you stick to your plan, yes it make sense and is a good tactic to pay off your loan in full quicker.    You could also consider a 7/1 ARM at a slightly higher rate to give you 2 more years of fixed rate, in case you need to slow down your pace at some point.
  • June 09 2011
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Hi Deane,

I think you have a good plan.  Even if it readjusts, then your payments wouldn't be too large, as it will reflect the current balance.  If I may make suggestion in tweaking your plan, then I'd suggest placing the extra principal payment into an investment account (can be even a savings account).  Once the balance in your investment account, then use that money to pay off the entire loan balance at one time.  This will provide you with some security, in case you need the money at a later date and keep your interest tax deductions more optimize.
  • June 09 2011
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Profile picture for sunnyview
It's your decision, but I wouldn't do it. I think a 5/1 in this situation is too short. Rates are almost guaranteed to be higher in 5 years and could be substantially higher. A 7/1 might be better, but would might still be scary if anything unexpected happens. You would also have to remain aggressive in your payment schedule all the way through to reap the full benefit from the risk.

I don't know what your rate is but it might help to refinance. I know I was able to refi my existing balance for almost nothing out of pocket and now I put the money saved toward principal. Doing that alone is shortening my mortgage from 30 years to about 22. You could run some numbers here with different terms and scenarios to see what makes sense. I like the idea of paying it off early, but the short term of a 5/1 scares me a bit. Take look and see what you think would work best for you.
  • June 09 2011
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Profile picture for DebbieNateghi
Hi,

I'm sure you have your gut feeling in what you really should choose to do. My advice would be : don't do it.

I have heard more horror stories and tragedies from ARM's then ever before. Unless you have a really good lender and the numbers work out, I would not do it.

Debbie 
  • June 09 2011
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"I have heard more horror stories and tragedies from ARM's then ever before."

I would love to hear some of these horror stories I keep hearing so much about. I have yet to actually hear one. 

People who have 5/1 ARMS taken in 2006 that are resetting, would actually be resetting to a lower rate now assuming it is allowed per their note. Even if it's not allowed to go lower, they are staying the same. 7/1 ARMS from 2004 are also going lower or the same. I hear about how ARMs have contributed to the housing issues yet I see absolutely no evidence of this. "Option ARMS" which negatively amortize certainly have been an issue, but your standard conforming ARM while risky at times, can be properly used to achieve one's financial goals faster. 

A hammer is dangerous when used by a moron, but very handy to a carpenter.

My $.02
  • June 09 2011
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the 7/1 ARM on my vacation home reset, went to 3.000%.

whoo hoo!

ARMs only work if you have a really good lender??????
  • June 09 2011
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ARMs are at a premium to the 30-yr fixed at this time.  That's not always the case.  5/1 ARMs are crazy low.  But five years passes quick.  7/1 ARM is a good compromise.
  • June 09 2011
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Profile picture for Deanne_OR
Hi Michael! I submitted an ap on your website yesterday.
  • June 10 2011
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Profile picture for shapiroamg
Soungs good but I vote 7/1 too. should not be that much higher than a 5/1
  • June 10 2011
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Profile picture for Flora.Li
Deanne,

I think you already figured out 5/1 ARM fits you best. When 5 years term is up, you only have 30K left. Even the rate goes up by 2%(worst case), the most payment goes to lower the principal. It won't affect you much.

My suggestion is to do 5/1 ARM.

Thanks
  • June 13 2011
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up 2% (worst case)???

really? The majority of 5/1 ARMs provided these days are with 5/2/5 caps.

2% is worst case if he gets one with 2/5 or 2/6 caps but odds are heavily towards getting 5/2/5.
  • June 13 2011
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