Should I refinance with a VA Hybrid ARM loan?

QuestionsShould I refinance with a VA Hybrid ARM loan?
asked 10 years ago

Alright I owe $ 104,900 on my mortgage currently with a 5.5%. I have been offered a VA 3/1 Hybrid ARM loan. This mortgage starts off at 3.5% and is fixed for 36 months. After that it reallocates and can go up a maximum of 1%, go down, or stay the same. It is reallocated each year after that, but it has a cap of 8.5%. The new mortgage will be for $ 111,000. so that is a total of $ 6100 for closing costs. Is this a good idea or should I run. To be honest it sounds pretty good.
I actually just got my VA fixed rate 5.5% in August of 2009. And we plan on living in the house for about 7-8 years and then selling.

JB replied 10 years ago

How long are you planning on paying this off? How many years do you have left on your mortgage and how long do you plan on making the ARM?

The longer the term the more I would recommend staying with the fixed mortgage.

rowlfe replied 10 years ago

Do the math. Find out which will cost you more out of pocket IF you pay it off under the terms. Assume the ARM adjusts at the maximum rate every year to reach the maximum cap. A spreadsheet would work out well for this since they have things like compound interest and mortgage calculation functions built in. The “best” one will the be the one with the lowest total out of pocket. Assuming a 30 year term, the ARM will max out at the 5 year point after the 3 year fixed beginning. From day 1 of year 9, your mortgage will be equivalent to a fixed 30 year term with 8.5% interest. I am guessing that in the 8 years leading up to the portion where they are effectively the same with only a different interest rate, you will pay somewhat less, but in the remaining 22 years, the added 3% difference will total MUCH more than what you saved in the 8 years leading up to that point. Still, you have to amortize each loan for the entire period or life of the loan and sum the totals from each year to determine which is going to cost the least overall. Don’t forget to factor in the closing costs in addition to all of the interest and principal for the loan as closing cost come out of your pocket or are rolled into the loan itself. I am confused as to why the new loan would be 11,100 MORE than your existing loan. Where is the extra coming from? A refinance is simply taking out a loan for exactly the remaining balance on an existing loan to buy it down to zero. I assume your existing loan is a VA loan, right? If so, there can be NO fee or prepayment penalty for paying the remaining current balance of principal!. So WHY the increase of 11.1K in principal? My gut tells me you would be better off with the fixed 5.5% especially because of the added 11.1K principal, but do the math for yourself to be sure.

Zackery replied 10 years ago has everything you need to know about refinancing, refinance rates, and what steps to take if you are interesting in refinancing.

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