Refinance a 15yr fixed to a 5/1 ARM?

Question

I have about 6 years, 6 months left on a 15yr mortgage:

Type: 15 year conventional mortgage (no PMI)
Rate: 3.75%
Balance: $64,780
Origination: 02/2012
Maturity: 01/2027

I am seeing 5/1 ARM refinance rates of 2.625% (2.808% APR) at Wells Fargo. Two questions:

1. Would a 5/1 ARM make sense for my situation? When I put my info into refinance search engines like Zillow for 5/1 or 7/1 ARM, no lenders come up.
2. If so, does it make sense for me to refinance to a 5/1 ARM at this lower rate? It seems I could make an additional monthly payment of about $95 on my current loan to pay it off in 5 years.

Thanks in advance.

Answer 1

It's probably not worth the closing costs. With only 6 years left you're not paying much interest relative to the principal. In fact, based on your current balance and interest rate you're paying about $200 (64,780 * .0375/12) a month in interest, whereas with the ARM you'll pay about $141 in interest a month. So you're saving about $60 a month in interest, and that savings is declining each month as your principal goes down.

You're essentially paying for a lower interest rate upfront through closing costs. If you don't have the cash upfront to pay the closing costs, you'll have to roll it into the loan, which would reduce your savings even more.

Plus there's the temptation to either "cash out" some equity or to NOT make the extra payments on the ARM which would reduce or even negate the savings.

It's not a horrible decision, but it's not a significant savings IMHO. You might check with your lender to see if there's a 5-year mortgage or other vehicle that would lower your rate, but again the interest savings needs to be worth the closing costs.