Specifically, I'm curious about the 7/1 and the 10/1 ARMs. I'm half-way seriously considering refinancing into one of these, mostly because I doubt I'll still be in this house in 7-10 years. I'm thinking of still paying the same amount that I am towards debts, although I would probably pay off my car/student loans first before putting the full weight on the home. Am I crazy, or might this work?
That is exactly the situation where ARM loans are recommended. That is, when you are fairly sure you will be out of the house before the rate adjusts. If you are absolutely sure you will be out of the house in a short amount of time LIBOR and loans with a balloon payment also can keep your costs down.
Disclaimer: I definitely don't recommend these loan types (especially the later) if you aren't absolutely sure you will be selling the house in the short term.
It's a similar situation to mine. I have 10 years left, but paying off in 7, so I'm considering a 7/1 if it has no costs. Do the math. If there are costs, how long till break-even? You're not crazy at all, as John said, it can make perfect sense. In fact, if the 7/1 starts low enough and has a reasonable cap, you may find that even if rates shot up, by sticking to the same payments for the 7 years, your principal is lower so that the payment due does rise quite so badly.
I think the shorter ARMs were popular with builders of homes. They could be pretty assured the house would be worth more finished that when they started to build it.
This is just hearsay from my wife who used to work in a mortgage broker office, but was not a broker herself.