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Refi advice 30 year fixed to 7/1 ARM

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  • Refi advice 30 year fixed to 7/1 ARM

    Loan size 1.4M

    originally 1.5M @ 3.5% 30 year originated 2017 (this loan is under the $1m deductible interest cap instead of the new 750k cap)

    Can refi to 7/1 ARM at 2.875% breakeven is 7 months based on 6700 closing costs and 890 monthly interest savings.

    confident by year 7, I can get loan to 971k (with extra payments) and probably 700k without much trouble.


    Worth doing it for the additional interest rate risk beyond year 7?

  • #2
    I did exactly that and got 2.6% on a 7/1 ARM. However I paid off the entire balance before the reset at 7 years.

    If you are planning to pay this off over 30 years, the outcome of your plan is unknown due to the interest rate risk.

    Is this your long term house? Over what period of time are you planning to pay this off.? The low rate is attractive, but the interest rate risk could be ugly, or not...

    The answer to your question is, it depends on your plans and on future interest rates, which are very hard to predict that far out. My guess is that rates will remain relatively low for quite a while. Of course, that is only a wild guess and likely to be wrong.


    • #3
      Thanks for your reply.  Goal is to pay if off early.  How early depends on bonuses and life events.  @ 7 years loan principal to 700k seems reasonable and can prob pay it off within 5 years from then no problem.  So I guess 12 years or shorter.


      Long term house.


      • #4
        Why introduce uncertainty of ARM into the equation?  Sure, rates look stable with growth flattening concerns --- is this the new normal?  at 3.5% you're fine IMHO; better things to throw money at IMHO depending where you are on the retirement and other buckets of things to do with funds.


        • #5
          I wouldn’t risk 1.4M on an unpredictable ARM, but that’s my risk tolerance. If you want it paid off, just throw money at it. You also say you’ll be stuck with 700k in 7years... which seems like a big gamble, because interest rates then are entirely unpredictable!


          • #6
            If inflation and interest rates go up significantly, your 30 year becomes a nice inflation hedge.

            I’d only do the 7 year if you plan to pay it off shortly after the fixed term.

            3.5% 30 is a historical all time low.


            • #7
              I would not, too much risk. You really don't know what will happen in the next 7 years or more in your life (healthcare expenses, etc.). If you plan was a 7/1 ARM to pay off in 5-6 years, I would say yes. But it is not.


              • #8
                I agree with the above and I would not refinance in that situation. 3.5% fixed is pretty attractive. You said that you could pay the remaining balance off 5 years after the rate changes but I’m assuming that would require funneling a lot of money toward the mortgage that you then could not use elsewhere. I am about 2 years into a 10/1 ARM at 3.375%. It will be paid off or paid down so much by the time the rate adjusts that any rate hike will be effectively meaningless. What rate can you get for a 10/1 ARM?


                • #9
                  I found I did better with ARM most of the time. The only time I would get a 30y is during a recession. But then I would be able to cope with a 5% or even 10% increase in rates.

                  If a spike in rates would actually affect you then you cover that risk with a fixed. Otherwise you risk maybe rates going up (who knows how much ?2%, 5%, 10%) for 0.5-1% less pa with an ARM, over 15 year period.

                  If you get tapped out during a rate spike episode, then you might be selling at a bad time and lose your equity. I guess that is the risk with debt. Presumably the authorities would do their best to prevent this from occurring, but it is possible and weirder things have happened in the past.


                  • #10
                    No way. That'd be a dumb financial move to leave your current loan with $1.4M locked in at a historically low 3.5 since your only picking up 0.625% rate reduction AND losing the deductibility of the interest on 250k every year (old cap vs new cap).

                    Presuming you're at the top marginal rate (if you're not and you took at a mortgage that big, yikes) and pay some state tax, changing to that ARM doesn't save you much, but adds on 21 years of interest rate risk. Currently, you can deduct 71.4% of your mortgage interest. You'll only be able to deduct 53.6% of your interest. (Both those will increase as you pay down principal).

                    Let's say your marginal fed rate is 37% + 0.9% ACA + 5% state taxes. (Adjust estimates for your reality)
                    - on your current mortgage, your effective rate is approx. 2.43%
                    - on your proposed 7/1, your effective rate would be 2.21%

                    Do you want to trade 21 future years of a locked in rate starting 7 years from now for a 22 basis point reduction at present?

                    That and why are you trying to pay off such a cheap loan early?


                    • #11
                      “ then you might be selling at a bad time and lose your equity.”
                      Is that the worst thing? Geez. I wish I would have known that.


                      • #12
                        Did you factor in the loss in interest rate deduction by switching, and the lost opportunity cost in paying it off early? Homes are typically poorly performing assets when owned by the user. This is where leverage is good, provided you’re not carrying high fixed costs into retirement.


                        • #13
                          Remember people who bought 7,8,9% long bonds or tips long ago and how good that looks now? The 30 year mortgage might be the equivalent of that in the future.

                          If you're youngish and not planning to retire in the next ~20 years and not going to move, then keep the 30. If you pay a fixed debt with future inflated dollars it could be a very good deal.