Refinance to 30-yr fixed or 5/1-ARM ?

[Anonymous]

Hi, My current mortgage is a 5/1-ARM with 4.25% interest rate that will adjust for the first time in July-08. My current balance is $200K (home is valued at $650K), I plan to stay in the house and would like to finish paying for it within the next 10 years. As such, I'm considering reducing the principal to $150K and refinance to either a 30-yr fixed or maybe even another 5/1-ARM since my desire is to keep my monthly payments as low as possible and pay off the loan faster by making additional principal payments per month. So the question is should I go for a 30-yr fixed or the 5/1-ARM knowing that I'd probably have to refinance once again. Thanks, gatorbill

[Anonymous]

You would definetley get a better rate on a 5/1 however if you do not pay off the loan in the next 5 years there is no telling what the rate will go up to when it resets and keep in mind if rates are going up during that time period it will increase every year. Most banks put a cap on the interest rate anywhere from 11 to 15% so it can continue to go up until you reach the cap.  30 year fixed would be the safer option especially since you plan on making additional principal payments if you do so on a regular basis it reduces the amount of interest you pay on the slightly higher rate dramatically.  Most lenders also offer 10 yr arms as well but the rates aren't much better than a 30 yr fixed.