Should I switch to a 30-year fixed or ride out the rest of my ARM?

Question

I have a 5-year fixed to adjustable rate mortgage which has 3 more years before it starts adjusting. The current rate is 5.5% on the loan. The principal is at $527K. Should I think about altering the loan to a 30-year fixed at 6.75% (which is still a historically low rate)? The adjustment would cost about $1000. I'll probably be staying in this home for a long time, and I would hate to be priced out of it in a few year if the rate went really high (like double digits).

Thanks in advance!

Answer 1

I've got one similar to that, albeit at 4.5%, and my plan is to ride it out until the adjustment happens in a couple years and then see whether refinancing is justified at the time (and I'll probably pay a bunch of it down if it goes too high). Check to see what the limits are on the adjustment, and if the worst case is more than you can handle. If it is, a refi would be safer, but my guess is that in terms of reducing the cost of the loan as much as possible, you're probably better off sticking with it for at least a few more years. It seems to me like the increasing proportion of retirees in the population is likely to keep the costs of borrowing at a historically low levels.

Like any financial planning decision though, it has an element of risk, so you have to decide if you can handle the potential downside. I'm not wedded to my condo or anything, so if I had to sell it, it wouldn't be the end of the world either.

Answer 2

Nobody can guess what the rates (or your credit score) will do within the next 3 years. You're taking a gamble either way - but I would suggest getting a fixed rate loan before the term is up.
If you have good credit right now and think your credit rating isn't going to improve any within the next 3 years, go ahead and get the fixed loan right now and hope the interest rates don't go down even more.
.

Answer 3

No one knows for sure what the market will do. What's the cap on your loan? If the most it can go up is 2% that year, I'd ride it out. That gives you 4 years to see if you can get a lower rate closer to what you pay now. Most people can't afford a giant jump in their payments. I work in the business and I think that rates won't get to the upper digits anytime soon. I'd even wait and see what happens with the election this year, who knows they could go down. I could be wrong, but that's my opinion.

Answer 4

I get this question a lot from my clients in ARMs.

Let it ride. #1 you will prob not get 6.75% on Jumbo loan right now. (single family or multi?)

#2. The difference in payment on 572k 5.5% versus 6.75% is $468 / mo. Almost all interest. Over 3 years, that is almost $17 grand.

#3. 3 years is a LOOOOOONG time in the mortgage biz. Let it ride. a bigger better deal will come along. Keep your eye on the market and check in with me from time to time!

Stay put.

Answer 5

the rates are creeping down but if i were you i would APPLY now, and keep your options OPEN. they are taking away JUMBO mortgages....so i would recommend applying and find out what the rate will be now.
find out how often the ARM adjusts...if it's yearly then you dont have to make a decision until 1yr from now.
if you have a lot of equity...you might be able to roll in some points to lower the rate.
I would also look at interest only if the rates are high.

Answer 6

Huge problems getting Jumbo loans right now, market is skitterish, in fact they are above the rate quoted, as reported in todays news.. Would wait a few months see if the market settles down and the go for fixed. You have the time use it and watch.

Answer 7

No one can predict what rates will do, but I suggest going ahead and switch to the fixed.