5/1 ARM: Is now a good time to refinance?
Here is my situation:
- Mortgage balance: $36,000
- Original Principal: $240,000
- Mortgage Type: 5/1 ARM
- My Rate (ARM) will go from: 4.875 to 2.875 next month
- Rate Limits: no higher than 8.125 over the life of the loan
- Rate Limits: for each adjustment period, the rate can change by no more than 2.0%
Does it make sense to refinance to a 15 or 30-year fixed rate given the current financial climate?
If you're going to refinance, now is a great time to do it. I just closed on Friday on a 2.875%, 30 year fixed loan on a house I'm probably selling within 5-8 years. How long do you want to take to pay off your loan? I'd only get a 5/1 ARM if you're planning on paying it off within 5 years. Otherwise, I'd get a fixed rate loan as the rates may never be lower than they are right now. For $36,000, I'd personally only get a 15 year fixed rate tops. Can you get a 10 year fixed loan?
Shop around. You should be able to find a no/low cost loan. I'd personally pay off a $36,000 mortage within 3 years tops but it depends on your circumstances.
I have a 5/1 ARM now (10 years in), and a good place to be at least for this adjustment period with 2.875 rate that will start next month, but i am concerned that if the financial climate (Index Rate) improves by the next adjustment period, my rate will go up, which is why i am considering a 15 or 30-year fixed rate.
How long do you want to take to pay off your loan?
Within the next few years.
I'd personally pay off a $36,000 mortage within 3 years tops but it depends on your circumstances.
Do you think it make sense to pay it off quickly if i have the means -- or is it better to keep the small amount for tax credit and improve my credit?
OK, with that new information, I agree with everybody else. I wouldn't keep it for tax purposes or credit building. You're so close (you can taste it 🙂) that I'd just finish out the current loan. 2.875% is really good and my understanding is that interest rates aren't going anywhere in the next couple of years. Congrats!
Thank you All! Great Feedback!
- I agree, i don't think "interest rates aren't going anywhere in the next couple of years"
- I agree, i am not seeing that much tax credit
- I agree, if my plan is to pay it off within the next years " costs of refinancing probably out weigh the benefits"
- In general, i am also in agreement that it's not a good idea to keep "debt to improve credit."
So, as suggested, i will probably keep the 5/1 ARM at least until the next adjustment period (at 2.875 rate) . and reassess at that time if i want to pay it off in full or not.