Looking to hear from interest rate prognosticators...what to do with my ARM

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mrsytf
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Looking to hear from interest rate prognosticators...what to do with my ARM

Post by mrsytf » Tue Jan 10, 2017 10:48 am

When we purchased our first and only home in 2010, we planned to pay it off early. We didn't have an exact timeline just..early. We just don't like debt of any kind.

We opted for a 5/1 ARM because it was the longest term offered to us at the lowest rate, which at the time was 2.625. With a low payment, we figured we could contribute more towards principal. When we told people we financed our home with an ARM, all we heard was GAAAAAASP! and all we saw was the head shakes. This was 2010. We persevered. Our payment with principal, interest, and real estate tax was $3500ish and we paid $5000 for four years. Year four we were not quite sure if we were going to stay in the house or possibly downsize so we stopped putting the additional into principal. I wanted to downsize, my husband and kids wanted to stay in place. After a cursory look at the market, we opted to stay. Our mortgage company allows us to "relock" the rate for another five years at the prevailing rate which was STILL 2.625 four and half years later. We are locked into this rate for another four years. With this ARM, it can increase by a max of 2% to a total max of 8.25%. We resumed paying the additional to principal.

So again, every time I mention we have an ARM, I still get the GAAAASP and the head shakes, but I'm inclined to keep it. Had we refinanced in 2010 or 2011 or 2015 when everyone told us we should, we would have certainly had a higher rate.

Realistically without suffering too much, we can pay off the remaining $420,000 or so mortgage in 10 years. That leaves us two - six years of potential "exposure". We are locked in for another four years and can relock again for another five, then we have the last year with a possible 2% rate increase.

My husband and I have no background in economics and am interested in hearing from folks who understand or have studied the financial markets. Has there been a period of time when interest rates have skyrocketed? What environmental factors contribute to that? Does any one see any of those factors in place at this time?

I understand perfectly that no one can predict the future. And I also understand to take these opinions/comments with a grain of salt. I'm just not very knowledgeable about macroeconomics and am interested in hearing people's thoughts.

qwertyjazz
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Re: Looking to hear from interest rate prognosticators...what to do with my ARM

Post by qwertyjazz » Tue Jan 10, 2017 10:55 am

It might help you to recast the problem in dollars - both as cash flow and total payments. How much could you be paying more if the rate goes up? Then you can look at how that might effect you. Macroeconomic guesses at interest rates is a really hard game. But you can at least figure out your personal risk profile.
G.E. Box "All models are wrong, but some are useful."

onthecusp
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Re: Looking to hear from interest rate prognosticators...what to do with my ARM

Post by onthecusp » Tue Jan 10, 2017 11:11 am

I've always leaned to 15 yr fixed but you have done great with the ARM. If you continue paying off aggressively your risk is a "high" rate just when the balance is lowest so the risk is going down every year you pay off aggressively. I'd keep it.

harikaried
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Re: Looking to hear from interest rate prognosticators...what to do with my ARM

Post by harikaried » Tue Jan 10, 2017 11:12 am

Will you be paying extra towards the mortgage either in the next few years or just before it adjusts? If so, even if the rates went up by 2%, your monthly payment could go down significantly. For example, our 3/1 adjusted from 2.625% to 3.875% the first time for this month's payment, and the monthly payment dropped to ⅓ the original payment. (But we knew the ARM was adjusting, so we very aggressively paid it down.)

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dm200
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Re: Looking to hear from interest rate prognosticators...what to do with my ARM

Post by dm200 » Tue Jan 10, 2017 11:13 am

There are some (not common) mortgage products - look for to find them.

A 5/5 ARM - where the rate only adjust every 5 years

A 15/15 "fixed" where the rate is fixed for the first 15 years of a 30 year loan - then can adjust after 15.

brad.clarkston
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Re: Looking to hear from interest rate prognosticators...what to do with my ARM

Post by brad.clarkston » Tue Jan 10, 2017 11:19 am

I'd burn that ARM with fire.

If you can pay it off early then do it as quickly as you can safely afford but if you think there's a chance you can't get out of it. Sell the house if you have to.

Depending on future interest rates that thing can balloon more than 2% so it's a risk which isn't completely obvious until hind-site sets in. I'm not that smart so fire works best for me.

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BolderBoy
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Re: Looking to hear from interest rate prognosticators...what to do with my ARM

Post by BolderBoy » Tue Jan 10, 2017 11:20 am

mrsytf wrote:Has there been a period of time when interest rates have skyrocketed?

Take a look at 1980-81; was ghastly. For a short time, my MM fund was paying >18% interest. My friend from South Africa proclaimed that we in the USA would never see mortgages offered at 5% again.

Will that happen going forward? Not likely (but not impossible). The fed has set a target of 2% inflation, so you should expect that it wants to get to that interest rate level eventually.

Best plan: pay off the mortgage as quickly as you reasonably can; the lower the principal upon which rising interest rates are applied, the less pain there will be. The ARM itself doesn't bother me that much.
“Where you stand, depends on where you sit” - Rufus Miles | "Never underestimate one's capacity to overestimate one's abilities"

onthecusp
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Re: Looking to hear from interest rate prognosticators...what to do with my ARM

Post by onthecusp » Tue Jan 10, 2017 11:22 am

Oh yeah. I bought my first house in 1980 when rates were way over 10%. So they can skyrocket. I hope that does not happen again but predicting it is kind of like timing the stock market. Refinancing would raise your rate now, who needs that when you are so close to paying it off?

ved
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Re: Looking to hear from interest rate prognosticators...what to do with my ARM

Post by ved » Tue Jan 10, 2017 11:42 am

brad.clarkston wrote:I'd burn that ARM with fire.

If you can pay it off early then do it as quickly as you can safely afford but if you think there's a chance you can't get out of it. Sell the house if you have to.

Depending on future interest rates that thing can balloon more than 2% so it's a risk which isn't completely obvious until hind-site sets in. I'm not that smart so fire works best for me.


This is not true. The ARMs are structured, so that they cannot go over a prescribed % between the rate changes. So, if the OP has an ARM that resets every 5 years with a 2% max increase, and a 8% life-time increase, then her next reset would be at a max of 4.625%, and a lifetime max of 10.625%. It cannot "balloon more than 2%".

OP, as harikaried said, get a amortization calculator/ spreadsheet from the web, and plug in your numbers, and the additional you are planning to pay till the end of the current term. You will then know what the outstanding balance is at the end of the current term. Based on a max increase of 2%, calculate what your max monthly payment will be if it did go up the full 2%. Then, you will know if you are comfortable with that monthly payment.

For what it's worth, I used ARMs (3-7 years) throughout my mortgage (and paid it off in about 16 years). It worked out cheaper than if I had got a 15 year fixed rate with the obligation of paying a higher monthly amount. With the ARMs, you get a lower rate (amortized on a 30 year schedule), and you have the flexibility to pay more or less during any given months as your finances accommodate.

Ace1
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Re: Looking to hear from interest rate prognosticators...what to do with my ARM

Post by Ace1 » Tue Jan 10, 2017 11:47 am

I think what you are doing is terrific.
Continue to aggressively pay down so that by the time the rate adjusts,
worst case it will only be 4.625 % for a much smaller amount of principal.
If you have any spreadsheet skills, prepare an amortization schedule for yourself
and see what the numbers would be under worst case rates.

crit
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Re: Looking to hear from interest rate prognosticators...what to do with my ARM

Post by crit » Tue Jan 10, 2017 11:56 am

I think your only mistake was in year four, where you didn't pay down extra principal for external reasons.

You got the low rate ARM so you could take advantage of it in its early years. Continue to do that, because it sounds like you're set up very well, and you got lucky with rates and timing.

You can do the detailed math, but I suspect that if you pay as much as you can at 2.625% for the next 4 years (and then either let the rate float by the limited amount, or refi), the potential savings in total interest paid are much more than if you refinanced now into mid-4% and paid the same total amount at that fixed rate over the same number of years.

Carefreeap
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Re: Looking to hear from interest rate prognosticators...what to do with my ARM

Post by Carefreeap » Tue Jan 10, 2017 12:17 pm

Ace1 wrote:I think what you are doing is terrific.
Continue to aggressively pay down so that by the time the rate adjusts,
worst case it will only be 4.625 % for a much smaller amount of principal.
If you have any spreadsheet skills, prepare an amortization schedule for yourself
and see what the numbers would be under worst case rates.


+1

I "inherited" an interest-only for 5 years, 1yr ARM loan on my mother's condo when she passed in 2008. Although my husband and I would have never voluntarily taken out an ARM on our own home keeping the ARM has actually made sense. I've never been able to refi for less than the interest on the ARM. And it is likely that the ARM rate will always be lower than a 30 year fix. You pay a premium for longer term money.

In year 5 of the loan (2009) it converted to 5% and started amortizing over 25 years. Over 5+ years I kept the payment the same even though the interest rate went down as low as 2.75%. I've since paid down the balance over $100k.

Now we are getting ready to sell it. The ARM doesn't adjust until October. Despite my misgivings, keeping the ARM wound up a smart move. Who knew?

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