Help Comparing 30 FRM to 7/1 ARM Refinance

**dczech09** · 02-26-2015, 10:05 AM

I would not do this deal if I were you.

Assuming that you stay on your current path of the 30 year mortgage and be done in 330 months, you will save approximately $29.70 per month on your monthly payment. Over the course of 7 years, you will only average a savings of $43.74 per month because of the lower interest rate.

And this assumes that you do move in 7 years. What if you don't? Then you are stuck with an adjustable rate mortgage, which is really dumb. Interest rates are near an all-time low right now. Where do you think they will be in 7 years when the fixed rate ends? They will not anywhere near today's rates (I would have to guess).

Put it this way -

You are assuming A LOT of risk for a potential time frame of 20.5 years while the bank is only assuming the risk of less interest for 7 years. Also, what kinds of closing costs are there?

Ask yourself the question "what is in it for my loan originator?" Why are they bringing this up to you? Do you really think they are trying to save you money? Or is it possible that there is something in it for them?

Over the course of 7 years, you would save $3,674 in interest total. And what if you don't move? What if you get stuck in this adjustable rate mortgage, or be forced to refinance again at a substantially higher rate?

You have a good interest rate. Really, it is not likely to get much better. I would stay where you are at and avoid the unnecessary risk!

**jIM_Ohio** · 02-26-2015, 10:38 AM

Originally posted by happyj View Post

I'm currently 30 months (2.5 years) into my 30 year FRM. I financed $228,000 on a $240,000 purchase and locked my rate at 3.625%.

My loan originator recently contacted me about refinancing. The current offer is 7/1 ARM at 3.375%. It is a no cost refinance for $218,000.

My current outstanding balance is $216,909.

Does it make sense to move to the 7/1 ARM if I plan to sell in the next 7 years?

It seems I'll save $76 a month for the next 7 years but giving up the flexibility of keeping the property beyond that time frame; if I don't sell.

I feel like I'm overlooking something?

Also, the property is now worth ~$290,000. Thanks for the help figuring this out!

A banker makes money when they close a new loan
They are under no obligation to help you or do what is in your best interest.

You did not list what your current payment is. $76/mo really isn't that much money... yet there is a decent amount of risk
risk you may not move
risk rates could go up before you move
risk for what rates are in 7 years

Are those risks worth $76/month?

**happyj** · 02-26-2015, 10:52 AM

Thanks for the replies. I was initially interested in the refi because I was quoted 3.125% which was going to save 0.5% on the FRM with every intention of selling in the near future (2-3 years).

I've filed all the paper work with my originator and during the process started to digest that I may want to keep the property as a rental.

It is a zero-cost refi without closing costs. The benefit was saving a few dollars per month and having a 'free' month before the first new mortgage payment.

I just needed a second voice on the subject since the savings at 0.25% difference no longer seems worth the risk as you both pointed out.

**Goldy** · 02-26-2015, 12:05 PM

I personally really like ARM mortgages assuming certain affordability criteria can be met. However, in this case I don't see much upside to refinancing to a 7/1 especially if you are going to keep it for the long term. The 7/1 will save you ~$6,300 in interest which is only ~$4,700 after taxes and you would be giving up the security of a fixed rate.

**jIM_Ohio** · 02-27-2015, 03:53 AM

Originally posted by happyj View Post

Thanks for the replies. I was initially interested in the refi because I was quoted 3.125% which was going to save 0.5% on the FRM with every intention of selling in the near future (2-3 years).

I've filed all the paper work with my originator and during the process started to digest that I may want to keep the property as a rental.

It is a zero-cost refi without closing costs. The benefit was saving a few dollars per month and having a 'free' month before the first new mortgage payment.

I just needed a second voice on the subject since the savings at 0.25% difference no longer seems worth the risk as you both pointed out.

What you missed though is your term is getting extended- if you paid off the new loan in 28 years (the amount of time left on current loan), you likely would be paying more

It might be zero cost out of pocket
but it is not a zero cost (likely added to the loan)

**happyj** · 02-27-2015, 04:28 AM

Originally posted by Goldy View Post

I personally really like ARM mortgages assuming certain affordability criteria can be met. However, in this case I don't see much upside to refinancing to a 7/1 especially if you are going to keep it for the long term. The 7/1 will save you ~$6,300 in interest which is only ~$4,700 after taxes and you would be giving up the security of a fixed rate.

Thanks for mentioning the tax savings on interest! Definitely forgot to factor that in when looking at numbers.

**happyj** · 02-27-2015, 04:33 AM

Originally posted by jIM_Ohio View Post

What you missed though is your term is getting extended- if you paid off the new loan in 28 years (the amount of time left on current loan), you likely would be paying more

It might be zero cost out of pocket
but it is not a zero cost (likely added to the loan)

Yeah that makes sense and was definitely considered. It would be nice to move to a 15 FRM if/when I start renting. It is only a 600sqft 1BR. Regardless, the additional term of the mortgage is important to remember and easily overlooked.

Great resource here, all replies have been on point and helpful!

Help Comparing 30 FRM to 7/1 ARM Refinance