Refinance with a 30 year fixed or ARM with 5 year cap?

Guest 0.10 Dollars($)

We had gone for a refinancing of our mortgage 4 years ago for $100,000 with a 7% 20 year fixed rate loan. I'm again looking to refinance and I'm being offered 6.20% for a 30 year fixed rate mortgage. I would require paying 2 points and total closing cost of $5500.

The mortgage company is willing to offer a loan amount that would cover the balance of my current loan ($94,500) and the credit card balance ($15000). I need to lower my household expenses and if I can get this loan, I'll be saving both on my mortgage and credit card payments.

However, another company that I approached is suggesting an ARM with a 5 year cap. I'm really not willing to go for ARMs, I've seen my friend suffer a lot due to rising payments. But I consulted a broker who's saying an ARM will be ok for me as I told him that we'll move out in a year.

Which do you think is the best option here? The interest rate on 3 credit cards range from 13% to 20% APR; the highest balance being $5000 at 20% APR. Suppose if none of the loans are approved, can we just pay off the mortgage and take a balance transfer with 0% financing for a year?

Guest 0.10 Dollars($)

i don't think you should worry about going for an ARM with a 5 year cap. This is because you will be selling the property within a year, so why worry about any change in the interest rates. The changes in rates won't affect you if you sell in a year.

miller_st · Joined: 17 Jan 2007 Posts: 917 168.84 Dollars($)

If you are getting a apr rate lower than 6.20% on the arm being fixed for 5 yrs. then you can choose this option. If your intentions are to sell the house within a year then you won't be affected by rate increase on the arm. But make sure that houses are getting sold in your locality or you might get stuck with the arm if the property market slumps. Can you give details about the arm that is being offered to you?

"Suppose if none of the loans are approved, can we just pay off the mortgage and take a balance transfer with 0% financing for a year?"

Can you give more inputs about how you will pay off the mortgage? And the 0% financing you mentioned.

larry · Joined: 27 Jun 2007 Posts: 3328 473.51 Dollars($)

Hello Smith,

30 year fixed rate mortgage won't be a suitable option for you as you will move out of the house after 1 year. And you will not enjoy the benefit from the offered rate of 6.20%.

You may refinance your first loan by taking a second loan. With that you can pay off your credit cards' debts. You can also evade such high closing costs with the second mortgage.

ARM with the 5 year cap seems to be a suggestive option for you as the payments towards the interest will remain fixed for 5 years. And as you will move out of the house after a year, you won't have to worry about the fluctuating rates on the ARM.

FYI, the current market interest rate on an ARM is going at 9.75%. For your convenience, you can also calculate the ARM payments using the following calculator: http://www.mortgagefit.com/calculators/arm.html

Samantha

Hi Larry,

I guess it's a typo error on your part. The current rates on an ARM with 5 year cap (5/1 ARM) is around 5.89%. However, I do feel Smith can go for it because the rate changes won't affect him in any way due to the 5 year cap.

But Smith, doing a refinance in any way will not help because you're just staying in the property for a year. But yes, I do agree with Miller here. You need to think about how the market turns after a year. But even if you are not able to sell quickly, there's still a 5 year cap on the ARM, so you won't have to bear any hike in the rates.

Moreover, you won't be getting advantage of the rates being lowered due to paying points. This is because the points you pay will not be spread across the life of the loan. Rather it will raise your loan costs currently.

I shall suggest that you go for a home equity line of credit or an equity loan with which you can pay off the credit cards. At the same time, you can avoid paying high closing costs as in a refinance first mortgage.

Hope this helps...

God bless you.

Samantha

larry · Joined: 27 Jun 2007 Posts: 3328 473.51 Dollars($)

Samantha,

Yes, you are right. It's error on my part in stating the current interest rate on an ARM.
Thanks for pointing my mistake.

ezmortgageloanz · Posted: Sat Aug 04, 2007 8:34 pm Post subject:

With intentions to move/sell the property within a year, you are safe to choose the program that offers the lowest consolidated monthly payment.

Buying down the rate with a 12 month exit strategy is throwing away money---you will not be in the property long enough to reach a breakeven point...

I suggest that you secure proposals for a no-cost loan (with the lender paying all closing costs) given your intended departure from both the property and mortgage.

Regards,

Scott Miller

Guest 0.10 Dollars($)

Yup, I agree with you guys, buying down the rate won't help i understand, so what would i do, get a home equity line?

kenstampe · Posted: Mon Aug 06, 2007 11:23 am Post subject:

You should crunch the numbers on doing a HELOC or second mortgage line of credit. Typically your total costs for this type of loan are $500 or often zero. Since you are only in the home for a year, this is what I would do. Incur as little COST, instead take the cost of the financing in the interest rate because that spreads it out over time which is to your advantage being in the home a year or less.

larry · Joined: 27 Jun 2007 Posts: 3328 473.51 Dollars($)

Hi Smith,

If you have enough equity build against your house, you may go for a HELOC loan to benefit from the current low interest rates which is also tax- deductible. With this loan, you can pay off your credit card debts and will also save much money on the interest payments. The main benefit of HELOC is that it saves your money.

But you have to take the responsibility to pay off that home equity loan , otherwise the lender may take your house.

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