5 Year ARM 5.86% from a 30year FHA fixed at 7%, Good or bad?

Question

We purchased our home 1/08 for 209,900. we put down $6,000 with a down payment assistance program through FHA and Wells Fargo. We then put an additional $6,000 down ourselves.

Total payoff on home is 197,900. Mortgage is a FHA 30Year Fixed at 7%. We are refinancing the house after 6months to lower our payment. We only plan to stay in this house for another year due to starting a family and wanting to be closer to our own families.

Our lender rep , who is also a family member, suggested a 5 year ARM at 5.86% which will lower our payment close to $100 a month. He said the rate will not increase more then 1% for 6 years which at that point we will have sold the house and moved on. He doesn't suspect the recent interests rates to lower due to the market within our 1 year left at the home. we have put in about $10,000 in upgrades and plan for another 10,000 in the next year. We suspect we have 10,000 in equity according to zillow.com.

Is this a good deal? Help anyone?

Answer 1

www.freeyourselfofdebt.com I didn't have to refinance or consolidate debt, this is an amazing solution for home owners who need help. If anything, there are three links to videos in the bottom right hand corner that you must watch they will tell you all about it.

Answer 2

If it is a 5 year ARM, that means the rate will stay fixed at 5.86% for 5 years.  Then it will adjust, usually yearly.  From what I'm reading it seems your adjustment in the rate can be no more than 1% up or down each adjustment period.  ARMS also have a cap, meaning there is an interest rate limit point where the rate can't go any higher.  ARMS also have an index and a  margin which are used to determine interest rate changes.  

Since you are only staying at the home for one more year, it may not be worth it to refinance.  Yes, your monthly payment will be lower, but you have to look at the closing costs associated with refinancing.   Some of these costs are:

    *  Origination fee - A fee to help cover the operational costs of processing the loan. It may be expressed as a percentage of the loan. You may choose a higher interest rate and not pay an origination fee.

    * Appraisal fee - A fee for an independent written opinion that identifies the property's market value.

    * Credit report - A document summarizing your history of repaying debts. A credit report is required for all mortgage loans.

    * Title search and insurance - covers the cost of examining the public record to confirm your ownership of the property and provides insurance to lenders of real estate that you have clear title to the property.

    * Legal fees - Fees paid to the attorney or company that conducts the closing.

    * Prepayment penalties - This means that if you pay off your existing mortgage earlier than the terms stated in the contract, you may be required to pay an additional amount. Check your mortgage documents to see if your mortgage contains a prepayment penalty.

Will the money you save per month equal out to your closing costs?  Closing costs on a refinance generally range from 3% to 5% of your loan amount.

Also, why are you spending $20,000 to upgrade a home when you are planning to move?  Are they "smart" upgrades, meaning they will add value to your home when you sell it or mostly upgrades that are your preference?  You don't want to pour money into upgrades that do not provide a good rate of return, because you'll never see that money again and the new homeowner will enjoy them, not you.

Answer 3

An ARM is never a good idea no matter what the rate is.

Answer 4

Back in 2000 I moved into my current home thinking I'd be in there 3 years and then move back closer to family or into a bigger home in this city.  After 3 years I figured it'd be 2 more years.  Well its 8 years later and I'm still in the same house.  So don't assume you will only be in there for a year or so.  I'd still stick with the fixed mortgage.  See if you can't find the $100/month somewhere else in your budget.  Honestly saving $100/month on a mortgage is very little if you have the means to put $10,000 in repairs into it.