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We have 7 years left on our mortgage with a balance of $104,000.00. Our house is worth approx. $300,000.00. We want to take $40,000.00 cash out for home improvements, making it a $145,000.00 loan. Is a 7/1 fixed ARM a good option for us. The rates are sooooo low right know and a lower monthly payment would be great for us. Also does anybody refi for a 7 year fixed??? Or should we go with a ten year fixed refi? Would like to move in the next 10 years as well. Thank You

  • What is the rate of your current loan? A decrease in the monthly mortgage payment is due to a decrease in rate, or an increase in length of the loan. – mhoran_psprep Feb 21 '12 at 11:12
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If you're sure that you're going to completely pay the $145K off in the next 7 years - you can take the ARM. But, if you don't, the rates are going to go up and you'll get hit.

10-fixed is IMHO a safer option, for the same period of time.

Note that you have 104K left for the next 7 years, but you're going to make it 145K for a similar period. Don't expect your payments to be much lower, if at all.

  • If the question was talking about a longer period, I'd agree re: Fixed v. ARM. But with the short loan period, the actual risk is very marginal. – duffbeer703 Feb 21 '12 at 15:36
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The problem with the ARM is that it only works if it works. If it all goes wrong you could be up the creek. And remember interest rates are about as low as they can go so you can assume that they will go up.

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The ARM is the better deal, as long as it is amortized over a 10 year period, and you have decent rate caps in place. My bank limits caps annual rate increases by 2%, and lifetime rate escalations are capped at 6%.

For example, if you get a 2.5% mortgage on $150k, you're only going to owe about $30,000 in principal by year 7. The actual cost of a rate escalation will be marginal at that point. (Your first year of interest savings will probably cover the risk.)

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