No. of Recommendations: 0
About 7 years ago, I found an ARM structured as a 10/1, with the first years interest-only at 2.85%, then floating with a cap of 4.85%.

These days, you probably won't find an I/O ARM with a 10 year initial rate lock. You might find one where you can pay I/O for the first 10 years, but the rate will probably only be fixed for the first 5 years. And even if you do find one, the rates are likely to be, at most, 1/2 point lower than the 30 year fixed, which means that the lifetime caps are probably 4.5% higher than the 30 year rate. And because of the I/O feature, they may even be as much as the 30 year rate. Not worth the risk unless you are absolutely sure you are going to be out of the property in a few years.

Altogether, we slashed our payments by over half.

Half compared to a 30 year fixed rate at that time, or half compared to your prior mortgage? If you're comparing to the prior mortgage, how much would you have been able to save if you had just refinanced into a 30 year fixed rate instead?

3) If interest rates dropped, so would our payment.

For mortgage interest rates to drop from where they were 7 years ago, we would have to have negative Treasury rates. It can happen, but I'm not sure that it's working out that well in Europe right now, since their GDP growth rates have been decreasing

4) If interest rates grew, we'd look at what our current mortgage offered & refi if needed or just pay off the loan through our savings. (The savings from the loan wouldn't itself be enough, but it'd be close enough for us to pull cash and pay the loan off.)

With a lifetime cap of just 2% (4.85% - 2.85%), that's a pretty small risk to take. Lifetime caps on ARM offerings are usually 5%, with 2% annual caps. That's quite a bit more risk to take.

Print the post  


Useful Resources
Our Home Center has all you need to make buying and owning a home a great experience. Get or refinance a mortgage and much more!
Buying/Selling a Home FAQ

Mortgage Professor
Offsite resource for mortgage questions.
What was Your Dumbest Investment?
Share it with us -- and learn from others' stories of flubs.
When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and Glassdoor #1 Company to Work For 2015! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.