Should I refi?

I have a 5/1 ARM. It can go up as much as it wants to at the end of the term - after that, it has a 2%/year limit.

Right now, I'm sending about 25% extra in principle payments every month. What I can't figure out is this: is it better to have a $1,500 mandatory payment, and be able to pay an extra $500/month in principle (for a few more years), or have a $2000 payment, mostly going to iterest, that is secure?

Yes, I am a first-time-buyer, California housing bubble person. THe mortgage broker sold me the whole "you won't live in the house more than five years anyway" thing.

What is the cap on the rate for your ARM? The easiest way to determine if you should re-fi is ask yourself, "can I make the payment at the maximum?"
I would much rather have a fixed rate in todays economic environment. Inflation is heating up and the Fed will continue to raise rates.

but I'd refinance.

but you also need to figure, as best you can, how long you will be in the house...you need to stay long enough that you will at least break even with the closing costs. If this is a long-term deal, my advice would be to sit down and do the math on how much you would pay over the long haul. Paying $500.00 extra a month on the principal of a home would have you paying off a fixed 30 year mortgage in (probably) less than 15 years...saving tens of thousands of dollars over the long haul.

There are all kinds of mortgage "calculators" on the web. Do the math.

If you are probably going to be there less than 5 years, don't refi. If you are going to be there longer it makes more sense to refi. You have to think about that.

You also need to get a good handle on the refi expenses. Those can be steep for the best rates. Many companies will lower the closing costs for a slightly higher rate. You need to figure those costs into your decision.

The odds of mortgage rates staying low are not good right now. Although if the housing bubble bursts, rates may even come down as mortgage demand dries up. My preference is always for a fixed rate, because my crystal ball is not very good. That way I always know the downside.

Can you refi and thereby cut interest on other debt that's at a high interest, like credit cards? That would be another reason to do it.

is whether or nor you're actually paying down principle with either your current mortgage or a new one. And if the bubble bursts, what then? Realistically are you likely to move in less than five years? Either way you answer that, what if something changes?

What you really need to do is sit down with someone who really understands these things, with whom you can lay our the actual financial details of your life, how much you make, the amount of the mortgage, and so on. I'm not sure that you can get a good answer to your question without someone else looking at the specifics.

Personally, I've never understood the claim that taking on the largest possible mortgage with the lowest amount of down payment is a good idea. Keep in mind that over the thirty year life of a typical mortgage you pay triple the mortgage amount in interest, and no, you do not get to deduct every bit of that, only a percentage that matches your marginal tax rate, you're out thousands, maybe hundreds of thousands of dollars.

Whatever happens, congratulations on being a homeowner and I hope whatever you do it works out well.

My feeling is that there's no way the fed can keep interest rates as low as they are. I'd personally feel very uncomfortable with anything except a fixed-rate mortage.

Previous points about factoring in how long you are planning to keep the property, and re-fi costs, are definitely important.

I have the edgy feeling that interest rates could start to climb at almost any time, much sooner than 5 years from now, but I can't really prove it.

For example, what is the present payoff on your home (this is the amount you would re-fi at current fixed rates)?

What is your current rate? When your rate rises, what does it rise to - you say it can go as high as it wants, but this is not true. What it can do, in the initial raise, is go the prime + x% limit specified, but it should not be able to go higher.

ARM's are genreally indexed to the prime rate. Further, the 2% annual limit is a maximum annual limit - it cannot arbitrarily go up 2% each year, and in fact, could go down if rates were to fall. This 2% limit actually protects you - if prime were to rise more than 2% in a given your, your rate increase is capped at 2%.

What rate could you get today? Most fixed rates are still around 6% - not a bad deal at all, and certainly better than the rate you are likely to pay when you have to refi, if it is several years out.

How long have you been in this ARM? How long until rate increases affect you?

What will your fixed costs (origination, appraisal fees, etc) be if you re-fi?

Ideally, you should run a payoff projection under all scenarios you are contemplating - assume a fixed over 30 years, total cost to payoff, plus the fees, gives you the total cost of the house over 30 years.

Do the same thing with some logical assumptions for fluctuating rates over the same period - you can set these up easily using excel.

The method that costs less over the life of the loan is the choice you should make.

Alternatively,if you have life left on the fixed rate period, and you do plan to sell, you are better off paying principle down as you are now. This builds equity.

If you plan to kepe the house, you should bite the bullet, accept the short-term fixed costs, and refi while rates are still at historic lows.

Keep in mind, whatever you're paying, rates can reach into the teens....

In case you haven't heard, the feds have been raising rates, the housing market is getting soft, and consumer confidence is in the toilet. Translation: interest rate increases.

Go to lendingtree or some equivalent and start the refinance process NOW. Dump that silly as ARM and get a 30 yr fixed. Hopefully your equity/debt ratio is high enough you can roll the refinance charges into the loan.

MZr7