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I have a 5-year ARM at 4.5% APR. I can renew the rate at 3.25%. However, that would cost $800. The current loan value is $156,219. Is it worth it for me to renew the rate? How long would it take to recoup the $800? I am planning on refinancing at the 5th year or selling the home before that.

Please, I do not want this to degenerate into a discussion of how ARMs are not good, etc. Let's just assume I know that a 30/15 year mortgatge would have been "smarter".

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Despite your note, an ARM is a really good idea for your time frame. Rates are going to be low for a long time. –  Jim Sep 3 '10 at 2:08

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When determining if you should refinance, you need to figure out how long it will take to make up the closing costs from interest saved under the new loan.

At 4.5% you are currently paying approx. $586 in interest each month. At 3.25% you would be paying approx. $423 to begin with. So, the first month, you will save about $160 in interest. The amount of interest paid each month will change based on how much principal you apply to the loan. However, you will be around $160/mo in interest savings for the first several months. This would mean you break even point would be around 6 months.

I would recommend the refinance to 3.25% assuming the $800 figure for closing costs is accurate. You will save several thousand dollars in interest payments over the next 5 years if you do refinance.

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You don't say how far you are into your loan. You can go here to see what your schedule will be at the new rate (at least until the rate resets).

Then see how long it will take to get your loan balance $800 ahead of where you would have been had you not refinanced. That will tell you if you have enough time to recoup the refinance cost.

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Nice link to the amortization calculator. I use that one quite frequently when I need to determine an amortization schedule. It is by far the best online tool I've found for that type of calculation. –  firedfly Sep 3 '10 at 2:47
    
I am about 12-months into the loan. –  RHPT Sep 3 '10 at 16:32

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