Refinancing with an ARM...good idea or bad?

[Anonymous]

Hi everyone...

Long story short we have a lot of debt due to a job loss, a new baby and my income being cut in half all within about a one year period.  We hit bottom about 2 years ago - but are finally beginning to see some light.  Both of us have new jobs with income of about $100k total.  Total debt is approximately $315,000 - this includes our mortgage ($200,000), credit cards ($50,000), and a 2nd mortgage ($65,000).  Mortgages have never been late - but we had a 150 day late and a 60 day late on credit cards.  All credit cards are now current and interest rates range between 0% and 6.9%.  The main mortgage is fixed at 6.75% with 23 years left.  The 2nd mortgage is variable - currently at 7%.  My score is at 543 and my wife is at 683.

My wife would like to consolidate everything into one loan - we have one offer we are looking at...It is a 3/1 ARM for $321,000.  It starts us at 7.88% fixed for 3 years - and then becomes adjustable.  The adjustable part scares us a little.  It is a 40 year loan.  The monthly payment would free up almost $700.00 per month - according to the mortgage guy if we apply half of this amount to the monthly payment we would have it paid off in about 20 years.

Any thoughts on this?  We are a bit confused as to what to do.  The adjustable rate part scares us the most.  I suppose after 3 years we could refinance again.  Any input would be appreciated.

Jim

Message Edited by ioweiowe on 04-17-2008 11:17 PM

[Anonymous]

In general, ARMs strike me as a horrible idea...plus, if I read this right, you're talking about refinancing into a mortgage with a worse interest rate than any other debt that you currently have.

I know that the longer term of the mortgage will lower your payments today, and I know that's very attractive, but you'd be paying thousands and thousands of dollars more in the long run. There are calculators out there that will help you understand exactly how much more.

I'm not sure why your scores are what they are, but if you could get by in your current situation for a bit more, pay down your credit card utilization, and get those scores up a bit, I'll bet you could find yourself in a much better situation. Even a bit of shopping around today might give you something more.

My mortgage company just offered me a streamlined refinance, dropping my interest rate to 5.875%, and my mid score at the time (i.e. the one they cared about) was 655. They said that people could qualify with a mid score of 620 or better and no late mortgage payments of one year, though perhaps interest rates would vary according to score.

I'd say that with a significantly higher interest rate than your current loans (and even higher than your credit cards!), and an ARM, you should RUN AWAY. There's got to be something better out there, or if not today, there will be with a little time, and a little bit of score-raising.

[Anonymous]

DO NOT REFI INTO AN ARM!!! I did this two years ago, and just had to come up with 60K in order to refinance out of it. Like you, I had ALOT of debt, and assumed I could refi in a few years back into a fixed. WRONG!!!!!!!!!! My property value plummeted, and I had to pay down the balance in order to refi back into a fixed. Fortunately, I HAD the $$$ to take care of this. If not, I could have lost my home.

[MattH]

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@Anonymous wrote:

DO NOT REFI INTO AN ARM!!! I did this two years ago, and just had to come up with 60K in order to refinance out of it. Like you, I had ALOT of debt, and assumed I could refi in a few years back into a fixed. WRONG!!!!!!!!!! My property value plummeted, and I had to pay down the balance in order to refi back into a fixed. Fortunately, I HAD the $$$ to take care of this. If not, I could have lost my home.

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I agree 100% it is a VERY bad idea to refinance into an ARM!! Many of those people
you see on the TV news losing their homes got into trouble by turning unsecured
debt into secured debt, do not make this mistake. You probably should have a
face-to-face session with a financial adviser, but I expect their core message
is gonna have some tough love: learn to tell wants from needs and cut out most
of the wants from your budget until you have reduced your debt substantially.

In theory it can make sense to consolidate debt if the interest rate is lower,
but in your case you don't even save on INTEREST!! And just about every published
personal-finance writer I've read says debt consolidation can be a HUGE TRAP
because it tempts people into thinking they have solved their problems. Unless
the budget is balanced by some combination of increased income and/or decreased
spending, moving debt around does not solve the real problem. If you consolidate
your debt without fixing the CAUSE of your debt, then a year from now you will
again have run up your credit card debt on top of the big loan. Postponing the
day of reckoning only makes it worse.

[Anonymous]

An ARM, in and of itself, is not a bad thing IF you read the fine print and understand how often it can reset, the interest rate cap, and the maximum you could end up paying. If you understand all that and can afford to pay the highest payment under the ARM terms, then it may be a good way to save some $$ now in monthly payments. We have a 5/1 ARM that can adjust 1x per year, can go up only 1% per year, with a cap of 8%. It has gone up twice and we're still comparable with fixed rates. You just have to know what you're getting yourself into.

All that said - I agree with previous posters. DO NOT roll your unsecured debt into your mortgage. This is a BAD BAD BAD idea, especially with house values continuing their downward spiral. What happens if you roll all that CC debt into your mortgage, and then 6 months from now suffer another job loss, severe illness, or other financial blow (or even just undisciplined spending) that causes you to run up your CCs again? Then you have a huge mortgage, maybe for more than your house is worth, and all that CC debt. It's a horrible situation to be in and you should run as fast as you can in the other direction.

If I were in your shoes, I'd come up with a budget. Figure out how much extra money you can put aside every month to pay toward your CC debt. Then use a debt paydown calculator - www.bankrate.com has a great one, and I've seen others discussed here - to determine your payment schedule.

Good luck to you.