great_and_mighty_adam_levine asked:


I have an interest-only ARM that I am currently paying 3.875% on, and indexes in August 2010.

On 8/2010, I need to pay principal and interest payments of 1 year LIBOR + 2.25%.

At the current time, LIBOR is at 1.5%, so that would be 3.75% – a really good rate. Of course, LIBOR can go up.

The interest rate is capped at 8.875%, which is high, but even at this rate, I could still afford my payment. I am in no danger of foreclosure unless I lose my job for an extended period. I don’t absolutely need the insurance of a fixed rate.

It’s a freddie-mac conforming insured loan with about 80%LTV, so I can get a streamlined refinance at roughly 5-6% with low closing costs.

I will be living here a very long time (presumably 15+ years).

So, I can keep my mortgage, which at least in the short term, will have a lower rate than refinancing with a fixed-rate mortage.

If I refi, I will have a higher rate and payment, but the payment will be guaranteed never to go up.

Wendy

2 Responses to “Should I refinance my ARM into a fixed loan even if it means a higher rate/payment?”

1. Dan B on October 18th, 2009 9:59 am

   Justin

   Mortgage lenders have no clue as to what the future holds for them or borrowers. Borrowers have even less knowledge of what the future hold for them. But lenders expect you to know. That’s why then write loans in their favor (ARMs are in their favor). I haven’t heard of any of the ARMs that have adjusted down in this current market. Your ARM will go up to make up for the lost interest revenue of the lender during your low interest years.

   If I could refinance to 6% fixed or less, I would seriously consider it. Even though your rate is very low now, it could go to 8.875% as you indicate. How long will it stay there is anybody’s guess.

2. MVD34 on October 18th, 2009 11:31 am

   Stanley

   Your question suggests that you do not belong in an ARM product. If you were my client, I would probably recommend refi.

   However, the technical answer to your question has two parts.

   Part 1: What is your expectation for interest rates over the next 15 years? If you do not have any expectations, you do not belong in an ARM.

   Part 2: What have you done with the difference between your normal mortgage payment and your ARM payment? If you don’t know what I am talking about, you don’t belong in an ARM.

   There are three good candidates for an ARM product. None of them apply to the typical mortgage holder.

   (1) Fixed ARMs: People who plan to live in a house for much shorter periods than the traditional mortgage. For example, if the gap between a conventional 30 year rate and a 5 year ARM is large and you expect to live in your house for less than 7 years, a 5 year ARM might be a good option. “Large” is subjective, of course, but traditionally it would be a least 150 basis points.

   (2) Strongly cash flow positive home owner in a declining interest rate environment. This person would generally “budget” for the monthly payment of a 30 year conventional mortgage (or the ARM high limit) while taking out a 1-3 year ARM. Apply the difference in every month to the mortgage balance and you pay off your mortgage very quickly.

   (3) High income/High asset renters in a high interest environment. “Renters” being slang. In select cases, a monthly mortgage payment that “jumps around” a good bit isn’t a problem so long as it is never larger than x% of monthly income. In those cases a LIBOR ARM or Interest Only mortgage may be a useful tool to keep housing expenses minimized in cases where clients like to move every few years. (Some rich people do with houses like the middle class do with new cars)

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