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A New ARM?

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Posted On: 05/31/2017

Question: We obtained a mortgage at 4.25 percent a few months ago. Now our loan officer has called and says we can get a 3/1 ARM with a start rate of just 3 percent. Should we take it?

Answer: If an ARM is so attractive today, why was it not attractive when you got your current financing?

There's no doubt the proposed new rate will represent a substantial monthly saving, at least at first. If you borrow $175,000 at 4.25 percent over 30 years the monthly cost for principal and interest will be $861 a month. If the rate falls to 3 percent, the monthly cost will drop to $738, a savings of $123 a month or $1,476 a year.

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So it would seem the refinancing offer would material benefit you in the form of a lower monthly payment. However, we need to look in little further at this arrangement.

First, is 3 percent the best available rate at this time with a 3/1 ARM? Would you prefer financing with a longer start rate? According to Freddie Mac, 30-year financing was available toward the end of March at 4.23 percent for fixed rate, prime financing and 3.24 percent for a 5/1 ARM – a loan with a two-year longer start rate than a 3/1 ARM.

Second, did you pay a point to finance the first loan? If you refinance after a few months, the value of your payment will be lost.

Third, what will it cost to refinance your current mortgage? Take a look at your old closing statement and check the fees and charges. Can you pay those again in cash or will such costs be added to the loan, thus increasing the size of your debt?

Fourth, how long will the new start rate last? Let's say it lasts three years – you will save $4,428 ($1,476 x 3). But what happens if the rate then goes up 1 percent in the first year after the start period? And then another percent in the next year?

Look at the potential costs involved with serial refinancing and then consider this idea: Since you have recently invested in a new mortgage maybe the best option is to hold on to your fixed-rate mortgage – a loan where monthly costs for principal and interest will never rise – and then take the cost of a second settlement and use that money to pay down your current loan balance. That way all the money will go to reducing your debt and not to taxes, fees and charges.

Peter G. Miller is author of "The Common-Sense Mortgage," (Kindle 2016). Have a question? Please write to peter@ctwfeatures.com.

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