Information and advice on 7/1 ARM 30 year loan refinance

I have a 7/1 ARM 30 year loan, my current rate is 5.75% and I have excellent credit. Should I refinance to get a better rate?

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Bill's Answer: Answered by Mark Cappel

In a 7/1 ARM 30 year loan, the rate is fixed for a period of 7 years after which in the 8th year the loan becomes an adjustable rate mortgage (ARM). The adjustable rate is tied to the 1-year treasury index and is added to a pre-determined margin (usually between 2.25-3.0%) to arrive at your new monthly rate. Ask what the margin, life cap and periodic caps of your ARM will be in the 8th year.

Refinancing to fixed-rate mortgages is an especially helpful move for homeowners who intend on staying in their homes for several years or indefinitely. By Refinancing your ARM to a fixed-rate mortgage you will avoid the payment increase when your ARM interest rate begins to adjust. You will also lock into a more stable payment for the term of your mortgage.

When deciding to refinance your adjustable rate mortgage (ARM) into a fixed rate mortgage, you first need to decide how long you think you will be in your home. You state that you are in the second year of a 7 year ARM, if you think that you will be staying in the house for only 2-3 years more, then you may want to wait until it is absolutely necessary to make the change. Your mortgage broker can advise you as to what the market may do, but they will not know what is in store for years to come. Concurrently they will also not know the number of years you will be in the home, along with any changes in your life that may require you to move.

According to Bankrate.com the current national overnight average interest rate for a 30 year fixed mortgage is 5.70% and the interest rate for a 30 year fixed jumbo mortgage is 6.67%. Let's say you qualify for a fixed rate loan at 5.70% you will have to see if this would benefit you in the long run. This is difficult to calculate as we do not know what your interest rate will reset to in the 8th year of your ARM. There is also the issue of prepayment penalty in your existing loan (if any), and the closing costs associated with refinancing. If there is no pre-payment penalty in your existing loan and, if you qualify for a no closing cost 30 year fixed mortgage, then it would make sense financially to refinance.

Since the housing market is down, coupled with the fact that you have a great rate at present, I would suggest that you wait until the market improves. If it does improve, you will be in a much better position to refinance at that time. If you would like to read more about mortgages and mortgage refinance, I encourage you to read through the mortgage refinance section on Bills.com available at http://www.bills.com/home-refinance/.

I hope the information provided helps you Find. Learn. Save.

Best,

Bill

www.bills.com

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