LeavingLondon

Hi. I was looking into refinancing our mortgage (bought our house just over 2 years ago on a 30 yr fixed). We can save $500 a month if we go to a 5 year fixed ARM with no points or closing costs or we can save $700 a month with approx $4500k closing costs ($700 down).

We always had 3-5 year fixed mortgages in the U.K but I’m a little nervous as it seems most people opt for longer fixed terms here. Is it a risk with taking (I appreciate no one here can accurately predict interest rate changes over the next 5 years)? Is my risk that in the next 5 years I won’t find a 15 or 30 year fixed rate which at least matches my existing 30 yr fixed rate? Or are there other risks I’m missing? Any advice would be greatly appreciated.

BigK

Re-fi, the great American racket!

When you re-fi to a 5yr arm, you are also resetting the clock to 30 years. In 5 years you may also be facing much higher interest rates. The Fed has already indicated rate hikes beginning in December. So you need to understand your goals here. Are you planning to be in this home for the foreseeable future? If so, lock in the lowest rate for the longest duration you can. Are you planning to sell anyway and move elsewhere or to a bigger home? Get the 5yr arm

My advice these days is that if possible, get a 15 year fixed. Rates are so low, that its a huge opportunity to pay down that mortgage fast and cheap

LeavingLondon

Many thanks. We are planning on staying in our house for the long term. I've just gone back to my bank and to the lender asking for quotes on a 15 year fixed. I read about the rate hikes next month, i guess i'm hoping (foolishly, perhaps?!) that at some point in the next 5 years, i'll be able to lock in a better long term rate than i have currently. Clearly i'll also need to really keep on top of interest rates. Maybe it's a risky strategy.

BigK

Its hard to predict the future, but with rates having been so low for so long, it appears that rates are only headed higher. So, if you can swing the bigger payment (not what you were looking for), lock in a 15yr now. Otherwise take your chances, or maybe even stick to what you have and revisit in a few years

Pulaski

Taking a 5 year ARM is a huge risk, and only usually appropriate if you are certain to sell within five years, or have no other alternatives, such as having truly terrible credit score now, which you know you can improve within five years.

The reason for the risk that if, for any reason, you don't sell, or can't refi to another loan, the interest rate can be nuts. The floating rate is nothing like a floating rate in the UK, it is going to be several percent higher than a standard 30 year mortgage rate.

When mortgage rates were between 6% and 7%, IIRC the related post lock period ARM rates were between 8% and 10%!!!

mrken30

It's also worth asking for rates on 10 year and 20 year, sometimes the rates are lower. You can also pay down a 30 year without penalty. Some people would advice getting a 30 year and invest the savings in equities. The returns on stock historically out-perform the 4% mortgage rate

Pulaski

I hear there used to be things in the UK called endowment mortgages and PEP mortgages that you would probably have liked.

mrken30

I am not sure if the mortgage rate was ever 4% when endowment mortgages were around. I certainly remember getting more than 5% savings rate. I did once have a 3% mortgage back in 98 and was getting about 5% or 6% in my savings account. I did not pay down the mortgage until the end of the 3 year fixed period.

AdobePinon

You should also check the rules on the ARM. I had a 7 year ARM once - it was limited to increases of no more than 1% per year after the 7, which I figured gave me a couple more years to get out of it. Turned out (by luck) that I left right at 7 anyway. Some ARMs can ramp up much faster.

LeavingLondon

Yes it is capped after 2 years I think.

LeavingLondon

Thanks for your advice. Can i not just take out a 30 year fixed mortgage in 5 or 7 years and increase my principal payments so that i don't reset the clock? I have asked for mortgage quotes based on what i have left on my existing term as i don't want to reset the clock now either so they have adjusted my principal accordingly.

mrken30

You can refinance at anytime with the ARM. The mortgage will reset to whichever product you choose, 10 year, 15 year, 30 year etc. Interest rates tend to be less for shorter terms , but not always. You can obviously overpay on most mortgages to reduce the term.

LeavingLondon

So will overpaying on the principal cancel out the issue of resetting the clock?

mrken30

It will mean that you will pay off the mortgage earlier. However the calculations you received from the lender will be based on "resetting the clock".

You are basically taking out a new loan to pay off an existing loan. New loans are only available in 5 year increments.

LeavingLondon

I've asked the lender to adjust the principal so that i start where i am leaving off i.e. to shorten my term to match what it is now.