Is getting out of an adjustable arm mortgage such a good idea?

Question

I Have a mortgage for around 335,000 and I took a home equity line out for 35,000. I was thinking of doing a refinance and getting out of the adjustable arm I have and locking into a 30 year fixed. But then I was wondering. When I do this my payments will jump to around $2000 a month if not more, so why don’t I just pay the extra $600 a month now to the mortgage I already have and pay it down?

Answer 1

Do it now, because rates are going up.

Answer 2

As a Mortgage Banker I would not recommend paying that extra money. It will not be enough to make a difference unless you pay the extra for quite a while. Take the extra 600 and put it into an interest gaining account that you can access without penalty so you can have that extra cash on hand if you ARM goes up severely. However I can also say if you are planning on staying in the home for a long time the adjustment on the ARM will go up far more than current 30 yr fixed rates. So you may want to refi now while rates are down.

Answer 3

There are varying schools of thought on this but it really depends on what your expected holding period is for the property.

If you plan on keeping the home for at least 5 years than a 30 year fixed is a great loan right now. The rates are historically very low and you would not get hurt.

If you are pretty certain you will be in the home less than 5 years than an ARM with a short term fixed rate is a better option. Why pay for a 30 year fixed rate if you don't intend to keep the loan at least 5 years? Of course, as you mention, you can pay additional towards principle and pay down the loan.

The biggest benefit I would see is possibly getting 1 loan to consolidate the first and second.

Here is some additional info. Hope this helps.

Answer 4

Basically, you just have to weigh the risks.

1) how long is your ARM locked for? Usually its like 5 years...so ho w long do you have left on the lower APR?

2) Yes, its a good idea to use that extra $600 to pay down either your principal or other high interest debts, or put it into savings. But dont just 'blow it' if you can afford to do something smart.

3) How much will interest rates rise? What if you could get a $2K a month payment now, but in 3 years that same payment is $2300 a month? WIll you be able to afford it?

4) Have you considered an interst only LOCKED loan? Usually the first 10 years is interest only, but you can CHOOOSE to pay that extra cash towards the principal.... but atleast then your rate is locked at the low 6%+ we're at now.

Answer 5

If I understand you, you currenttly have a ARM. plus you have a home equity line of credit. and total it comes to 1400 a month?

If your ARM is past the fixed rate term and is now adjustable, I would stay with the ARM. It is very unlikely the Fed will be raising interest rates any time soon. In fact there are rumors that the Fed is thinking about lowering the rate by a quarter point.

Answer 6

because if rates go up so does your payment....30 year fixed is the way to go. Then no matter what the market does...your payment won't change. Rates could get as high as 12%!!! Then you'll be paying more for your house then it's worth.

Answer 7

The advantage would be to lock in a longer term fixed rate. you can force teh amortization as you say, but you could pay a lot more in interest if your rate increases.

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