When to refinance a mortgage?

[jzunic]

We bought our first home, a townhouse, in June 2006. We don't plan on staying in it for more than 5 years, as we will likely need more room and want a yard, etc. by then. However, with the housing market the way it is, we realize that we may need to stay longer than planned so that we don't lose money. As well, there is also a remote possibility that we'll be able to keep the home as a rental once we move to a bigger place.

We have a 5-year ARM through ING - it suited our needs best at the time, as the rate was very competitive (5.95%), and there were minimal closing costs. We could have afforded a 30-year fixed, but felt the 5-year ARM was the best choice overall. But rates have dropped somewhat since last spring, and we could probably get a 30-year fixed at around the same rate.

So now I'm wondering when/if we should think about refinancing to a fixed rate? Like I said, we don't plan on being in the home for more than 5 years, but you can't predict the future. I know calculators exist that determine whether or not it's worth it to refinance, but they usually expect you to know how long you will stay in the home and how much the closing costs will be - both factors I don't know.

Any advice would be appreciated - thanks!

[jIM_Ohio]

Closing costs will vary on the size of the loan. Some people on some boards tell me they "never" pay closing costs, and end up with higher apr's than the rest of us.

I am in middle of refinancing our first and second. 1st is being reduced from 6.375% to 5.875%. With rate drop this week, I might squeeze another .15% out of it...

second is dropping from a 9.5% adjustable (prime+1) to 7.3%.

When does it make sense?

I think the cost ($8000 including pre-paids for us) makes this something to only do when you'll have house "long term". I went into my house vertical and will be taken out horizontal (stretcher, gourney or body bag), so refinancing makes sense to me.

In your case, assuming condo is worth slightly less than my house, I would assume you could close for 2k-6k. If the cost savings in the next 4.5 years would save you more than the 2-6k it will cost, I'd consider it.

Here's a few things to look at- what happens in 2011 if you are still in condo?
If it "reammortizes" what would it look like today (have you paid down enough principal?)
I think environment today is rate neutral- 33% chance rates go up, 33% they stay the same, 33% they go down. They would go down if economy does bad, and go up if inflation kicks in. 66% of this favors you, 33% works against you. Do you like your chances?

When to finance to a fixed rate-

when you want to reduce your risk
when you can save the money it costs to close (in a short amount of time)
when you will be in house for a significant length of time

when to keep adjustable rate product-
when you will be getting rid of property soon
when rates are going down
when you cannot recoup closing costs with lower payment
when you can handle the risks of rates increasing

it's risk/reward/cost issue, to me

In the meantime, some tips:
pay down the principal of the ARM. In worst case, it reammortizes with a lower principal
watch rates, look to "buy points" to lower rate even further. This may save you money "faster" by paying points.

[LivingAlmostLarge]

What does your ARM cap at? My arm caps at 9% so I'm okay with it readjusting in 2012. I got a 7 year arm in 2005. It's deifinitely not worth it to refinance if you manage the payment at the higher rate. Plus you never know where the rates will by then.

I am not planning on staying longer than 7 years and thus the ARM.

[sweeps]

I'm one of those that never pays closing costs or fees. In exchange, my broker charges an extra 1/8 of a percentage point. Sure, over the long haul that would result in a slightly higher amount of interest paid, but I've never gone long enough without buying a house or refinancing where that happened. It makes the calculations very easy and it gives me flexibility to refinance again if rates continue to go down with no out-of-pocket cost.

To answer the OPs question, I would leave it alone. If you were in the last year or two of your ARM or if the 30-year was at least a 1/2 pt below your ARM, I would say refinance. But that doesn't seem to be the case.