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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 https://tradingeconomics.com/european-union/gdp-growth

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.

AJ
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