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[marigolds]

(Can you all tell that I'm finally, at 39 freaking years old, learning how to be an adult with respect to finances?  Thanks for all the help decision-making over the years, dad, but your help actually didn't help me become independent about this!) 

Anyway. I'm currently paying ~7% interest on our mortgage, fixed-rate, 30-year, and I have about $108K balance.  I'm considering moving the mortgage to my local credit union (only employees of the state can join, and it has a very good, solid, stable reputation for being extremely fair to its customers and having the lowest-rate credit - as in cards and loans - around.)

They're no longer offering fixed-rate mortgages.  These are the terms they offered, and I *think* they seem fair, but I'm terrified of the very notion of an ARM after all the news accounts in the past 4 years about the mortgage-lending crisis.

It starts at 3.75%.  It's fixed for 2 years, then can be adjusted, then is fixed at that adjusted level for 2 years, etc.  It can't go up (or down) more than 1% at each adjustment, and can't go up or down more than 8% total over the life of the loan.  I can instigate a "rate modification" if the rate they offer (which is related to, but not commensurate with, the market rate) is lower than the rate I'm currently paying, at any time.  I can prepay as much as I want with no penalty.

Right now I'm paying my own taxes and insurance on the house, which is a b*tch, and my payment for the mortgage alone is $700/month (the taxes are about $3K/year, and the insurance is about $500/year [I think.])  My monthly payment with this new mortgage would escrow the taxes and insurance (which would stay with my current carrier) and roll them into the payment, which would be $800/month - AND I wouldn't have to pay this January's $3000 in taxes that's hanging over my head.

This seems like a way better solution, but is there something I'm missing? 

[hegemony]

I don't think any ARM is anything but sucky.  The risks are too high.  Your payment could go through the roof.  Since you can't predict what will happen, it's also impossible to compare ARMs with fixed-rate mortgages.  But the risk is too high!

I've had two houses, one of which I refinanced, so three mortgages.  In every case I got a much better deal than my local credit union was offering by going through a mortgage broker.  (In one case I ended up refinancing with the same mortgage company, for a much lower rate, and not using the broker, but I threatened the mortgage company with leaving and they responded by offering me a good deal to refinance with them.)  My latest mortgage was a ten-year mortgage at 4.5%.  There are very good fixed-rate mortgages out there right  now.  Don't handicap yourself by sticking with your credit union.  They likely don't have the clout to offer really competitive rates, and an ARM is a disaster-in-waiting anyway.  Call a real estate agent and ask which local mortgage broker they've heard good things about.  The broker should offer services free to you.  Getting a lower rate can save you thousands over the years, and getting a fixed-rate can save you losing your house (or your shirt).

[inthelab]

Can you convert the ARM to a fixed rate at all?  If not, look for someplace that will allow it,
Check out ING Direct and Wells Fargo for some good mortgage options.
you don't want to wind up paying 11%, which could happen.

[mad_doctor]

With interest rates currently at all-time record lows, there's no place for an ARM to go but up.  Not to say that an ARM isn't the best choice for you right now, but the interest rates will almost certainly be going up very soon.

[profxfiles]

Obviously I know nothing about your credit, etc. but I just refinanced into a fixed rate at my credit union at 4.25% with no points and no closing costs. Mad_doctor is right--the only direction that ARM percentage is going to go is up, so the only entity taking a risk here is you. I'd check around and get a fixed rate quote.

[marigolds]

Anyway. I'm currently paying ~7% interest on our mortgage, fixed-rate, 30-year, and I have about $108K balance.  ...
[The ARM] starts at 3.75%.  It's fixed for 2 years, then can be adjusted, then is fixed at that adjusted level for 2 years, etc.  It can't go up (or down) more than 1% at each adjustment, and can't go up or down more than 8% total over the life of the loan.  I can instigate a "rate modification" if the rate they offer (which is related to, but not commensurate with, the market rate) is lower than the rate I'm currently paying, at any time.  I can prepay as much as I want with no penalty.

So...despite the adjustment caps and rate modification stuff it would be worse?  I figured out that even at the HIGHEST possible biannual adjustment, I wouldn't reach my current interest rate for 9 years, and that's if I don't do any rate modifications in that period.

I will look into the mortgage broker option - I know the regular mortgage rates are really low right now, so that might be a way better option.  I didn't realize that credit unions weren't usually competitive with their mortgage rates.

You guys are WAY better than my dad.

[raoul]

OP, your mortgage balance is low enough that you might be able to pay this off relatively quickly. If you can pay about $1000 a month in principle and interest you could pay off your whole mortgage in about 10 years. That would make an ARM considerably less risky, given the limits on the amount this one can go up.

OTOH, I would make sure you understand the rules correctly, as my impression was that banks used to regularly offer this "maximum 1% increase" deal but that changed at some point. Are you sure there's a 1% cap with every adjustment? Because if it can really only go up a maximum of 1% every two years, then that's considerably less risky than most ARMs.

OTotherOH, I also echo those who've pointed out that you should be able to get a significantly better fixed rate than what you have now. Given your low balance, you should at least look at 15 year fixed rate mortgages, which have lower rates than 30 year. According to Bankrate.com, the rate on a 15 year fixed mortgage is 4.64%, which would be a big improvement over where you are now. Principle and interest on that would be $833.94 per month, plus you'd have about $300 per month in taxes and insurance.   

[madhatter]

I don't buy anything I can't understand.

[marigolds]

I don't buy anything I can't understand.

I wouldn't even have a microwave if I held to this rule!

I called the mortgage broker today - she's going to send over an estimate this evening.  Thanks for making me think further about this, everyone - the fixed rate 30 year (I couldn't pull off a 15 year, though that's a good idea for the future when we've been solvent for longer) is something like 4.75 right now, so that'll be a good improvement right there.

[jackit]

I would take a fixed rate at 4.75% any day.  It's a great deal!

[marigolds]

Obviously I know nothing about your credit, etc. but I just refinanced into a fixed rate at my credit union at 4.25% with no points and no closing costs. Mad_doctor is right--the only direction that ARM percentage is going to go is up, so the only entity taking a risk here is you. I'd check around and get a fixed rate quote.

So we found a fixed-rate at 4.85 and are locked into that rate unless it goes lower.  So yay.

Profxfiles, how did you negotiate the no-closing-costs part?  Did you just ask nicely?  Do they want borrowers with really good credit enough to do this if I ask? 

[profxfiles]

Obviously I know nothing about your credit, etc. but I just refinanced into a fixed rate at my credit union at 4.25% with no points and no closing costs. Mad_doctor is right--the only direction that ARM percentage is going to go is up, so the only entity taking a risk here is you. I'd check around and get a fixed rate quote.

So we found a fixed-rate at 4.85 and are locked into that rate unless it goes lower.  So yay.

Profxfiles, how did you negotiate the no-closing-costs part?  Did you just ask nicely?  Do they want borrowers with really good credit enough to do this if I ask? 

In this case, I suspect it was because I refinanced through the credit union that already held the note, but I have done it before simply by asking for it.

[aristotelian]

We did a refi earlier this year.  They did not waive closing costs, but (and I suspect this is more typical) they rolled them into the loan.  This means it takes longer for you to break even in the short term, but it lowers your rate for the long term.  You can do the math to figure out how long you will have to stay in the house for you to break even, but if you have no plan to move in the near future, it is a good idea to refi now while rates are this low. 

We lowered our rate by 1% on a loan of 180k and figured that it would take us two years to break even on the closing costs.  You have a lower loan but a bigger difference in the interest rate, so I would imagine the math would work out about the same for you.