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[melba_frilkins]

Well, I've bitten the bullet and am going to meet with a mortgage broker to refinance. (Yuck, must go and find last two years of tax forms, two months of bank statements, etc.)

I was browsing refinance rates online and noticed that with a 5-year ARM the APR is only 3.5%. I know ARMs are risky. But, my thought is that during those five years I would continue making the same monthly payment that I am now, but more money would be going toward the actual principle. Then I could refinance in 5 years when the rate goes up. 

Too risky? Things I'm not taking into account?

[cgfunmathguy]

Way too risky. None of us know what will happen in the next five years. However, in his book The Total Money Makeover, Dave Ramsey points out that there are studies (Census Bureau, maybe?) that note that 80% of Americans will have major life-altering events in the next ten years. If this event coming up is bad (job loss, major disability, etc.) and it happens in the next five years, will you be able to handle the payments when rates go up and you can't refinance because this occurence has shot your credit rating to he!!? This is not to be a party-pooper, but only if you expect to leave your current residence in the next five years should you even consider an ARM. Otherwise, you need to be dealing with a fixed-rate mortgage (preferably 15 years or shorter term).

[madhatter]

No. Very bad. Chance of interest rates being this low or even lower in five years is nil. Chance of interest rates being substantially higher is good. Interest rates are as low as they'll ever be. If you're going to lock in a permanent rate, the time to do it is now.

[clean]

Then I could refinance in 5 years when the rate goes up. 

Wasnt that the mantra of a whole bunch of people?  Now their equity is gone and no one will make them a loan without a sizable addition of money.  Next time it could be that the rates are 18%.  It has happened before. 

The others have already answered.
1.  Rates are at historic lows.  Do you think that in five years they will be lower?  Fifteen year fixed rates are at 4.5% (bankrate.com).  Why save only 1% when you can lock in the loan for the full 15 years.
2.  You have no idea what may happen in the next 5 years that may keep you from qualifying for a new mortgage.  Hopefully all goes well, but when "All will be fine" is your game plan, the plan will is pretty shaky.

Finally, as others have quoted Dave, let me add, If this is more than a 15 year loan, or more than 25% of your take home pay, then it is too much house - keep shopping.  (And renting is not a sin).

[melba_frilkins]

Ok, I'm convinced, no ARM for me!

But in refinancing to get a better APR, maybe I can shrink my 30-year (23-years remaining) mortgage into a 15-year. That would be great.

[cgfunmathguy]

That should be possible. Also, go online to mortgage calculators (there are several of them--just Google the phrase) and see what your payment would be for a 15-year mortgage of $x at y%. You really don't want this number to be more than 25-30% (lower is better) of your take-home pay. Ramsey, whom both Clean and I have quoted tries to get people to stick to 25%, but he's not hard-and-fast on it. 30%, however, should be a brick wall.

[ideagirl]

Ok, I'm convinced, no ARM for me!

But in refinancing to get a better APR, maybe I can shrink my 30-year (23-years remaining) mortgage into a 15-year. That would be great.

Some mortgage companies offer a 20-year, so ask about that.

However, it makes more sense in my mind to refi as a 30-year and then make monthly payments as if it were a 15-year. (Think of the monthly payment on your 30-year mortgage as a "monthly minimum"... then go to an online mortgage calculator and plug in the numbers to see what your payment would be if it were a 15-year loan, and pay that instead.) You'll pay it off in 15 years if you keep it up, BUT you have the option--if a major life event intervenes and you can't hack the high payments that come with a 15-year loan--of lowering your monthly payments down to the significantly lower payment that your 30-year mortgage requires, until things improve and you can go back to making the higher payments.

Yes, you'll pay slightly more in interest for a 30-yr than you would for a 15-yr, but I think of that as the cost of insurance: major life event insurance. It helps ensure you won't lose your house or have your credit shot to hell if a major event intervenes.

[cgfunmathguy]

However, it makes more sense in my mind to refi as a 30-year and then make monthly payments as if it were a 15-year. (Think of the monthly payment on your 30-year mortgage as a "monthly minimum"... then go to an online mortgage calculator and plug in the numbers to see what your payment would be if it were a 15-year loan, and pay that instead.) You'll pay it off in 15 years if you keep it up, BUT you have the option--if a major life event intervenes and you can't hack the high payments that come with a 15-year loan--of lowering your monthly payments down to the significantly lower payment that your 30-year mortgage requires, until things improve and you can go back to making the higher payments.

Yes, you'll pay slightly more in interest for a 30-yr than you would for a 15-yr, but I think of that as the cost of insurance: major life event insurance. It helps ensure you won't lose your house or have your credit shot to hell if a major event intervenes.

Ramsey notes that very, very, very few who say they will do this actually do it, because something else ALWAYS comes up (the dog needs braces, you need to neuter the kid, whatever). You need an emergency fund so that the life event doesn't cause these problems, and then you need a 15-year term on the mortgage. Read the book. It really does help.

[ideagirl]

Ramsey notes that very, very, very few who say they will do this actually do it, because something else ALWAYS comes up (the dog needs braces, you need to neuter the kid, whatever).

That is where setting up automatic payments comes in. If you don't have even enough self discipline to do that, then forget this option. But it's a wise one if you have the minimal level of self discipline required to fill out the auto-pay form at your bank.

You need an emergency fund so that the life event doesn't cause these problems, and then you need a 15-year term on the mortgage. Read the book. It really does help.

I haven't read it, but maybe I will.

[sciguy]

Ok, I'm convinced, no ARM for me!

But in refinancing to get a better APR, maybe I can shrink my 30-year (23-years remaining) mortgage into a 15-year. That would be great.

That is almost exactly what my wife and I did (though we had a few more years remaining than you).  Our monthly payment went up a bit about $70/month  but now half of our payment goes to principal instead of less than one quarter.

[mozman]

However, it makes more sense in my mind to refi as a 30-year and then make monthly payments as if it were a 15-year. (Think of the monthly payment on your 30-year mortgage as a "monthly minimum"... then go to an online mortgage calculator and plug in the numbers to see what your payment would be if it were a 15-year loan, and pay that instead.) You'll pay it off in 15 years if you keep it up, BUT you have the option--if a major life event intervenes and you can't hack the high payments that come with a 15-year loan--of lowering your monthly payments down to the significantly lower payment that your 30-year mortgage requires, until things improve and you can go back to making the higher payments.

Yes, you'll pay slightly more in interest for a 30-yr than you would for a 15-yr, but I think of that as the cost of insurance: major life event insurance. It helps ensure you won't lose your house or have your credit shot to hell if a major event intervenes.

Ramsey notes that very, very, very few who say they will do this actually do it, because something else ALWAYS comes up (the dog needs braces, you need to neuter the kid, whatever). You need an emergency fund so that the life event doesn't cause these problems, and then you need a 15-year term on the mortgage. Read the book. It really does help.

This is what we did, and still do.  This is why despite starting out with a zero-down ARM in 2006, and losing a big ol' chunk of house value, we had enough equity after 3 years to refinance into a lower fixed rate last year.

[2much2do]

When I got my last mortgage, I was leary of a 15 year mortgage, because I was changing jobs and wasn't quite sure how it would all work out.  But I did manage to pay down the mortage, and will be paid off this year, after 15 years.  But I will say it was tough to keep paying the extra, especially while going to grad school.  But it can be done - you just have to forget what the actual bill is, and keep paying the larger amount.  Of course, now I'd really like to put in a small addition with a second bathroom, so the illusion of no house payments won't be real, but ... whatever. 

[tee_bee]

Chime on clean's comments, et al. The "I can refi in 5 years" thing got so many people in trouble. I would rather live next door to Chernobyl than have an ARM.

As to paying more to principal I just try to round my payment to the next highest $50 or $100 increment, so as to pay a bit of the principal down. When my escrow contribution changes--if I am contributing "too much" I leave the payment as is; if paying too little, I just reround. For example, I went from about $1350 to $1425 recently, so I now pay $1450 instead of $1400. I'm thinking of boosting this to $1500. This is sort of what 2much2do did--take the longer term, but pay it like a shorter term mortgage, for the flexibility. I don't pay a lot extra, though--I have student loans with higher rates and fewer tax advantages that I try to pay down quicker.

If we all had greater confidence in interest rates going down or staying stable in the next five years, we might all be locking in low-rate ARMs. But with interest rates having nowhere to go but up, and with fixed rates at near-historic lows, I think it's best not to mess with anything other than a boring 30 year fixed mortgage, like my mom and dad had in the 60s. But I am incredibly risk averse, so there's that.