Is it wise to refinance a fixed mortgage with a 2-year ARM?

Question

We have equity in our home and are considering a refinance to take out some of the equity for home improvement/repairs and to buy a vehicle end of lease. Credit scores are not great, 500-550ish. We have the option to either A) Do a 50-year fixed mortgage or B) Do a 2-year ARM and then refinance again in two years when our credit scores have improved. I'm not excited about paying closing costs now and then again in 2 years. We want to have the equity cash but also want to have as low a payment as we can get to minimize living expenses.

Would it be wiser to do the 50-year fixed or a 2-year ARM and then refi after 2 years for a fixed rate? Paying closing costs twice in two years seems like a lot of money to me.

Additional information: We are currently in a 30-year fixed mortgage at 6% but do not qualify for that rate on a refi due to credit changes.

The purpose of our considering the refinance is to reduce our monthly living expenses by eliminating a car payment and to get money for home repair/maintenance. We have no debt but want to lower our living expenses. Financing our end of lease vehicle is not going to get rid of the car payment, only create a new one.

Answer 1

What ever you do DONT! do an ARM. There have been some bad press about them. your situation does not sound bad. I know some people who would love to have your current rate. Do you really need to refi at this time?

Answer 2

The best thing to do would be to hold off on the refinance until you can get your scores up. The rate you will get on a 50 year fixed will be very high with your scores and you will incur closing costs twice with the 2 year fixed rate loan. Neither option is really appealing. From the info your provided, if you MUST refi now, I would pick doing the 2 year fixed. Yes, you will incur closing costs twice, however, if you improve your credit scores you will qualify for a much better loan then. In other words would you prefer to pay 7.5% to 9% over 50 years or 7% to 8% for two years, refi, and then pay (depending on the market at the time) 6.5% over 30 or 40 years? Only you and your mortgage professional can run thru the numbers for your specific scenario to determine what makes the most sense for you. There is no "right" answer. I am a mortgage professional in CA. If you would like to contact me further, email me at [e-mail]

Answer 3

NO WAY! I have worked as a mortgage loan officer and it sounds like someone is trying to give you a raw deal. First off, FORGET the 50 year fixed rate mortgage. IF you borrow for that duration, you will be paying off INTEREST ONLY for 25 years! And with the bubble on the verge of bursting, the value of your home could slide below what you borrowed, then you'll have no choice but to be stuck in that loan until the value rises again. Sure, you might get a better payment for a 50 year loan, but you will be paying mostly interest for the duration of your loan! That means you will have less equity when you decide to sell or refinance again down the road.
As for ARM loans, I do NOT recommend them. Reason being that in two years it is highly unlikely that your credit score will have changed enough to improve your position. In two years you can bet on the FACT that your APR will jump (along with your monthly payment). Bad news if you can't get out of that two year ARM, because then you'll be stuck, or have to pay closing costs on an entirely new loan that won't be much better.

This is what I recommend: get a fixed rate loan. Only get a loan that is 30 years or less. There are places out there that will make out the loan for you, but don't be lazy, you need to find them. Otherwise, you will be making payments that do nothing toward reducing your loan amount.

If you can't afford a 30 year loan, you probably shouldn't be getting a loan at all. I can't stress enough that you should avoid the 50 year loan at all costs.

Answer 4

With interest rates going up, you're foolish to turn in that 6% 30 year fixed. Find another way to get money -

BTW, there are no closing cost loans available through your credit union, even if you have a low credit score.

I would NEVER take home financing on a depreciating asset (your vehicle) - when your vehicle comes off lease, the dealer may have a financing option available for you - use the equity in the vehicle to finance it if you want to buy at end of lease. With residuals low (the value of the vehicle after lease), you should be able to fully finance your buy out price.

Answer 5

You need to keep what you have and do NOT, I repeat NOT refinance a ARM. That would take you down a very slippery slope and in 2 yrs. you might not be able to refinance at all, then wh? You need to be conservative now, pay down what you owe. Don't spend a dime that you don't absolutly have to and save any thing you can. That rate you have you won't get again and rates are apt to rise before your 2 yr. and all that money to close and bla bla bla will put you in the hole. Please don't let anyone talk you into it. It will ruin what you have and what you have is better than you think. Never mind home improvements. Save and do a little at a time. At least you won't owe for it. The end of lease vehicle....don't know what to tell you. Bad way to own a vehicle and I wouldn't do that again for anything. Just save and make it, you can do it!!!

Answer 6

Neither of those are bad options if you really need the money to pay down credit cards or other bill. I am a mortgage banker at one of the largest and most well known private banks in America. I do loans like this for people that over extend themselves all the time. I can do out of these in my sleep as long as your are closer to 550 than 500.

Feel free to give me a call or send me an email if you want to talk shop. No charge no commitment, never hurts to get advice from those at the top of the industry 312 738 8436


Edit: Girl is wrong if your debts are CC debts it makes all the sense in the world CC debt is often at 22% or so, a new loan will be at 8ish max. To me that looks like a savings of 14% not a loss of 2%. Also don't forget that mortgage interest is tax deductible, CC interest is not.

Answer 7

Hi matt,

With the situation you ahve explained, i would suggest whichever program is offering the lower rate...

Being your credit score has dropped, you have to look at this as a 2 step credit clean up process...

You need to be able to get your scores up to qualify for a new loan.. the only way to do that is to start frest with a new mortgage company, and make PERFECT payment history with them...

The 2 year arm will most likely be the lower rate., and make most sense for you... The 50 year, even being fixed is going to cost you triple the interest...

As for paying closing costs twice.. you are right.. IT MAKES NO SENSE!!! This is why you should work with a mortgage company that gives NO CLOSING COSTS FOR REPEAT CUSTOIMERS..

At my company, we have a pilot program called a 2 step credit clean up... Once you ahve improved your credit, you refinance again with uys at NO COST... its not a gimmick, i actually provide it in writing letting you know hta tthere will be no costs the second time around...

The reason most mortgage companies dont offer this is because they do not bank their loans..

The company i work with is a Bank and a correspondent lender.. Meaning we have the ability to bank our loans, if you dont qualify through us, we can use one of our sister companies/partnered investors to get you a loan..

Being we actually bank the laon, we have a vested interest in keeping you as a customer.. (unlike 90% of mortgage companies in America which are brokers and only make money on points and fee's)

This is also why you will find MUCH LOWER costs with a correspondent lender rather then a brokerage...

I think you already realize that it makes send\se fo ryou to take advantage of your hom's equity and pay off your car, and do some repairs.. Now you need to determine who is the best lender, and what is the best program option...

I think if i were in your shoes, i would go with a 2 year arm, and refinance again in 2 years to a 30 YEAR FIXED!

You jsut dont want to make that move until you improve your credit score, and no better way to do so then to refinance all together...

I work with Providential Bancorp, we are a nation wide mortgage lender... You can call me at any time if you would like to know what i can qualify for... You can make the final decision on who to choose, but i guarnatee if your workign with a brokerage, i can not only give a lower rate, but much lower costs as well..

I have answered positing such as yours on this site for almost a year now.. In that year, i have refinanced 14 homes, and helped 19 people purchase a new home... I dont say that to gloat, but to let you know that i answer questions on this site to assist people with financial needs... I work with a company that has more programs and options thaen your ordinary mortgae lender.. I have helped many people here that thought they were out of options because they were denied by other lenders... Everey lender is different, and all have different guidelines when lending money... You just have to find the one that suits your needs best...

Feel free to caontact me through email or phone...

Look forward to assisting you!

Jason Fry
licensed Mortgage Loan Officer
Providential Bancorp
[e-mail]
312-264-6448

Answer 8

I can help you! I am a mortgage broker who works with over 100 lenders nationwide and have programs to fit almost any situation! I would love the opportunity to take a look at your situation and get you the best deal that fits your needs! Please feel free to contact me [e-mail] or directly @ [phone] ~Joseph Correa