Q: My husband and I have 6 years left to pay on our 10 year (refinanced) mortgage. Our balance is approximately 116k at an interest rate of 4.25. My question is…..should we consider a 5 year arm at a rate in the mid 2’s? We can pay off in approximately the same time at a much lower rate.
We both have credit scores hovering at or just below 800. Not sure if its worth making a change.
A: This is a great question and the answer really depends on a couple of things. It’s always attractive to drop an interest rate by 2 percentage points so that’s a positive. The caution I would mention is the concept of flexibility. If you’re certain you can pay the balance off before the rate lock period expires, then that seems like a good idea. If however, there are unforeseen circumstances that would prohibit you from paying the balance off, you don’t want to get stuck in an ARM if we’re in a period of rising interest rates. Obviously we’ve seen some historically low rates but it’s difficult to predict what 5 years down the road looks like. So in summary, consider the possibility of not being able to pay the balance off and what it may look like in year 6 or 7. But, if you are confident in your ability to do so, securing a rate in the 2’s is very appealing.