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I am looking to refinance my house. My friend just got a 5 year adjustable rate loan at a super low rate. Do you think the savings is worth the risk, or should I stick with a fixed rate?
Corey H. in Sandy Spring, GA asks:
Stephen,
I am looking to refinance my house. My friend just got a 5 year adjustable rate loan at a super low rate. Do you think the savings is worth the risk, or should I stick with a fixed rate?
Corey,
The answer depends on your situation and interest rate difference between the programs. For over 2 years now we have been in a "fixed rate market" meaning that the rate on adjustable rate mortgages (ARM’s) were almost the same as fixed rate loans, so the decision was easy. But in the past 2 months the market has changed. Now 5 year and 7 year ARM's are priced .50% to .75% lower in rate than a 30 year fixed. The savings may equate to $200 to $300 per month or more.
Now the question to ask is how long you plan to stay in the house. If the answer is 10 years or less, than an ARM may prove to be the prudent choice. Keep in mind that most ARM’s are 30 year mortgages. The rate will change with the market after the initial fixed period, but unlike a "balloon loan", the mortgage does not become due after the initial fixed period.
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