Should I refinance my mortgage now or wait until my ARM expires?

Question

I'm two years into a 5 year ARM with an interest rate of 4.375%. I'm worried that interest rates will just keep climbing and that I'll suffer for it in the long run if I don't refinance. I do have a 2% cap per year after the fifth year. The rate could get to above 11% total if I don't refinance. However, I just cringe at the thought of refinancing at a HIGHER rate, even though it may be better in the long run.

Just to clarify, the ARM is fixed for 5 years (but can go up 2% a year after that) and I'm considering refinancing into a 30-year fixed loan, even though the rate will be higher.

Answer 1

It's interesting that Mortgage Guy dissed all the people who gave you answers as being "kids" who don't know what they are doing and then told you the same exact thing that they told you. I would like to offer you a slightly different take. Currently in some markets short term ARM rates are actually higher than 30 year fixed rates. This is an unusual phenomenom which doesn't happen often and it is related to the weakening of the US dollar. As you may be aware, the Federal Reserve has been raising interest rates regularly over the past couple of years to try and keep inflation in check. By and large they have been successful. The two areas where inflation has been running away from us is fuel prices and home prices. Factors beyond the control of the Fed caused fuel prices to rise as they have (excess worldwide demand caused by strong economic growth in India and China as well as instability in the Middle East) Home prices were mostly driven by excess demand. By and large the run-up in home prices is seen as slowing in most markets. We just had an economic report showing GDP in a virtual stand still. I point out all this economic mumbo jumbo to demonstrate that if things remain as they are now, there is less of a liklihood that the Fed will have to continue raising interest rates to combat inflation. I also point out that we have been spoiled over the past 10 years by the historically low mortgage interest rates. It hasn't been that long since interest rates were 17%. Rather than having a knee jerk reaction and refinancing, I would recommend allowing things to settle out a bit on the economic front and see where things fall out. If I understand the terms of your loan correctly, your rate will remain at 4.375% for the next 3 years and then the max it can go up the following year is 2%. That means for the next 4 years you will have a very competetive interest rate. A lot of things can happen between now and then. Since it has only been 2 years since you refinanced, you probably are only breaking even right now from the fees that you were charged from your last refinance. Every month that you are paying 4.375% from now until the first adjustment is money savings that you are keeping in your pocket and could be thought as offsetting any future interest rate increase. Another option that you might want to look at is rather than doing a refinance, a lot of companies allow you to do an adjustment of your current loan. They will charge you a flat fee of about $1000 and then they will adjust your loan by giving you an additional 5 year ARM at whatever the current rates might be. It's a much cheaper option than refinancing. Some will allow you to adjust to any product that they offer. Check with the company currently holding your ARM mortgage. Good luck to you and be careful about the agenda that people have when they offer you "advice".

Answer 2

Rates are on the rise, and they don't look to be stopping anytime soon.

Doing it now is going to ensure it can't get any worse for you. Yeah you're taking a ding now, but over 30 years?! Getting that into a fixed rate is definately going to be your best option. Like I just said in another response. If you know how to talk and have a high credit score, you may still be able to able to finance w/an interest rate of 6.49%. Now, there hasn't been a rate increase since the end of June, which given the trend would mean the next one will be in the next couple of weeks. So get a fixed rate in writing asap, to ensure you don't miss out on a the best rate possible for right now.

Also if they do start going back down in the next 3 years (which I can't see happening) refi is an option then too. Just do it for 27 years at that time, and keep the same principle balance you have at that time. Don't take out any extra credit and don't change the term. That way you're only getting a better interest rate!

Answer 3

Hello,

I have to first say that you should truly disregard most of the previous answers... It looks like the majority are simply kids trying to gain more meaningless points here...

My name is Jason Fry, i am a licensed loan officer for Providential Bancorp.. I dont mean to plug my company, but want you to realize this wil be credible information...

Now, even though your rate currently is extremely low, you have every right to worry about where interest rates wil be in 3 years when your ARM expires..

Ive personally seen rates fo from 4% to 7.5% over the last 3 years, and it doesn't look like its going to stop any time soon..

The weaker the US dollar becomes, the higher the rates get... As you see on the news everywhere, the US dollaris falling faster and faster...

Now your decision is going to be taking the chance of locking into a fixed rate (around 7%), that could be higher then rates in 3 years when your ARM would have expired...

But the chances of that are slim...I anticipate rates being around 8% or higher at that time...

Either way, when you get a higher rate, your payment will slightly rise.. (depending on what term you decide for your new mortgage)

Either way, the stability of knowing your interest rate is fixed, and you wont end up with a 12% rate..

And especially with the things going on in the middle east... who knows what will happen!!

Either way, i would act NOW if you decide to refinance.. Rates now if you have good credit could be in the high 6% range.. You need to hurry though because there will be another increase in the next couple weeks..

If you would like assisttance with a refinance, I would be happy to help.. I have helped many people from this site both refinance and purchase a home..

You can contact me direct at 312-264-6448, or email me at [e-mail]

Providential Bancorp is a nationwide lender, and is also in great standing with the Better Business Bureau.. See sources for more info..

I look forward to assisting you further! Good Luck!

Jason Fry
Licensed Mortgage Originator
Providential Bancorp
312-264-6448

Answer 4

You have a good rate so pay off as much as you can over the next 3 years. Hopefully by the time the ARM kicks in interest rate will be lower or you will have paid off so much it won't matter.

Tha interest rates are not good at the moment and every time you refinance you incur closing costs that add to the loan.

My ARM kicks in next month but I paid off more than 66% of the loan over the five years I have a low rate. At this point it is not worth refinancing just pay off the rest of the loan..

Answer 5

Yes you should refinance. When you refinance, your monthly payments may go down and your rate will be fix for life. That way, you will know how much you need to save to pay for your mortgage without the need to guess each month. Interest rate on mortgages are subjected to a interest cap limit, which I believe its 8.5%.

If you are planning to move very soon, say within the next 5 years, then you should keep the ARM to take the benefit of the low interest rate you have now. If you are going to stay longer than that or maybe for life, then refinance to cut your total interest payments in the long run.

Answer 6

Based on the information you provided, I would probably say you should stay in your 5 year ARM. Right now, the rates for a 30 year fixed are at about 6.5%. Your interest rate would be less than 6.5% for at least the next 4 years (the remaining 3 years of the fixed rate and the 4th year increase to a maximum of 6.375%). Thus, unless you think interest rates will remain at 6.5% or above for more than 4 years, it probably doesn't make sense to refi. Another factor to consider is simply your comfort level with uncertainty. If you don't like the uncertainty about interest rates in the future, refi now. The higher rate you pay for the 30 year fixed is essentially "insurance" against uncertainty.

Answer 7

If I was you, I would do it as soon as possible. The Fed may not increase the interest rates again, but they just might.
Anyway, your ARM is going up, so better if you get a fixed rate, that you can deal with, knowing what it is, every month, can be a god send.
Shame you didn't do it earlier, but I understand the lure of those low rates.I started that way too, but soon, changed over.

Answer 8

Find out if you are past the place where refinancing would result in a penalty. If you are, then definitely refinance NOW while interest rates are still reasonable.

Answer 9

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Good Luck!

Answer 10

yes refi. unless you're paying it off tomorrow. arm's are for suckers.