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?

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    • Superbone
    • YNAB convert since 2008
    • Superbone
    • 3 mths ago
    • Reported - view

    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.

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  • How long do you have left on the 5/1 ARM?

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  • Thanks.  

    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.

    Superbone said:
    How long do you want to take to pay off your loan?

    Within the next few years.

    Superbone said:
    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?

     

    Thanks again!

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      • Herman
      • herman
      • 3 mths ago
      • 1
      • Reported - view

      Sky Blue Mare personally I don't believe in ever keeping debt to improve credit.  I can't imagine you are seeing much of a tax credit either. 

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      • Herman
      • herman
      • 3 mths ago
      • 2
      • Reported - view

      Sky Blue Mare if you expect to pay it off in the next few years the costs of refinancing probably out weigh the benefits.

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    • nolesrule
    • YNAB4 Evangelist
    • nolesrule
    • 3 mths ago
    • 1
    • Reported - view

    You are unlikely to find any lender who will take on a $36k mortgage.

    And if you do you are unlikely to find a better rate than the ARM. Very mall balance mortgages, when available,  tend to have higher than average rates.

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    • Superbone
    • YNAB convert since 2008
    • Superbone
    • 3 mths ago
    • Reported - view

    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!

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    • Superbone
    • YNAB convert since 2008
    • Superbone
    • 3 mths ago
    • 1
    • Reported - view

    As for credit building, use your cards to pay for everything that you can and then pay it off. Request higher credit limits. Just don't keep any credit debt. Check your YNAB categories before every purchase.

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      • ynaber2613
      • ynaber2613
      • 3 mths ago
      • 1
      • Reported - view

      Superbone Agree with using credit cards to keep your score going.  I have zero debt but use credit cards to pay for practically everything and keep them paid off continuously.  My score is high (830).  Not sure if it will go down over time with only having credit card accounts, I guess time will tell.  I still would not take on an installment loan just to improve my score though, I hate paying interest.  

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      • Superbone
      • YNAB convert since 2008
      • Superbone
      • 3 mths ago
      • 1
      • Reported - view

      ynaber2613 Sounds like you and I are in the same boat. My score is also 830. But I do still have a mortgage. Once you get up that high, it doesn't matter. I just refinanced my mortgage and anything over 760 is gravy.

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    • Superbone 

      Congrats both of you on your high credit scores.  I didn't start with good credit score (not because of debt issues, but lack of credit history) , which is why i was stuck with 5/1 ARM mortgage. I am still building  up my credit score, but to be honest with you, i haven't checked my score for long time.  I will probably check it in the next few days. I do have one credit card that i use once a while and i have it setup for automatic  payment via my debit account.

      Like 1
  • 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. 

     

    Thanks Again!

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    • PhysicsGal
    • Nerdy female homo sapien
    • physicsgal
    • 3 mths ago
    • Reported - view

    Just pay it off.  Your balance is so low, and that right right now isn't bad.

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