Refinancing a 5.25% 30 years fixed rate to a 5/1 ARM at 3.25%?

I would like to refinance my mortgage with the same lender going from a 5.25% 30 years fixed rate to a 5/1 ARM at 3.25%

I am looking at $3000 in closing cost. After the refinancing my total monthly payment will drop from $1140 to $928, saving me $212 per month or $2544 per year. I do not plan on moving in the next five years. To me the math adds up to $12,720 savings over those five years of the ARM.

Is this a good idea? I plan on refinancing again to a fixed rate right before the ARM expires. My only fear is rates going way up by then. But given the state of the economy and the housing market in general, is that likely to happen? Would you do it?


Ok Ok I get it. Most answers seems to think it is a bad idea. What if I plan on selling within the 5 years of the ARM? Would the $2544 saving in interest per year or $12,720 over the five years of the ARM still make sense?

6 Answers

  • Anonymous
    9 years ago
    Best Answer

    First of all, I do think it is likely that interest rates will be higher in 3 years than they are now. There is a lot of pressure building up for inflation. As soon as the economy comes back to life -- even partly -- I think that inflation will increase, which will raise interest rates. And the overall interest rate is not dependent on housing prices coming back. To a lender, money is money. You could have a continued bad market for housing PLUS high interest rates. That's what happened in the 1970's, and there is no reason that it couldn't happen again.

    However, the key for someone in your situation is to look at the limits on rate increases for your adjustable mortgage. If you have a good limit, such as no more than 1.5 percent per adjustment, you can have a revised rate for years 4-6 of no worse than 4.75 percent. If the limit is 2 percent, then your maximum rate for those years would be 5.25 (what you are paying now), so you are still ahead of the game. I would not agree to a 3-year adjustable with anything more than 2 percent per adjustment.

    If you know you will be in the house for a while, however, you might want to look for a 5-year ARM. You will need to pay a slightly higher rate, but you will have a longer lock in period. Given that inflation definitely seems to be coming, that might be worthwhile.

    Good luck!!

  • Anonymous
    9 years ago

    why on earth would you switch to an ARM when rates are as low as they possibly go?

    rates will definitely be higher in 5 yrs - refinancing to a fixed rate THEN might put you into a 7% mortgage - can you afford to have your monthly payments double??

    stay where you are and if that $3000 is money you don't really need - put it towards debt or pay down your mortgage principle by $3000

  • 4 years ago

    I plan to sell my home within 2yrs. I currently have a 30yr 5.25%. I need to debt consolidate and thought I would refinance to a 5/1 arm at 3.50%. Is this a good idea?

  • 9 years ago

    This would be a REALLY dumb idea. First of all, rates are at or near historic lows. They can only go one way.....UP. The next couple of years should be recovery years and interest rates will climb to ensure inflation stays under control.

    Then, what if rates spike and/or you can't refinance due to job loss or similar event?

    It ain't broke dude...don't fix it.

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  • Anonymous
    9 years ago

    Bad idea. NEVER go to an ARM when fixed rates are this low.

  • 9 years ago

    Very bad idea, just my opinion.

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