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5-Year ARM with 3 years to go. Re-finance or not?

November 12th, 2008 · No Comments

Scenario:

Bought a small house two years ago. Got a 5-year ARM at 6% interest rate — had a growing family with young kids, planned to upgrade to a bigger house in 5 years.

Can we sell the house within the next three years and still make a profit? Given the recession and layoffs, we want to stay conservative, maintain our cash position, and delay the upgrade to a bigger house. Will LIBOR rate goes up a lot in three years that we have to pay a higher rate when our mortgage rate becomes adjustable? Some worries.

What I did:

I’ve been watching mortgage rates daily. Late last week the rate came down a little bit. I locked in 5.875% for 30-year fixed. I know some folks has much lower rate than this when they re-financed earlier this year, but I think it’s a decent rate. I don’t want to wait for lower rate — the economy will get worse.  In the 70’s when we had stagnation, mortgage rate was as high as 10% – 12%. 30-year fixed at 5.875% is pretty low from historical standpoint. It also gives me peace of mind, and removes one uncertainty from my personal finance.

Some people suggests that I should wait — I still have three years to go. Essentially I’m holding a 3-year option to sell the house or refinance. But, I’m not sure how soon the housing market will recover and how mortgage rate will change. We’re facing the more severe financial crisis since Great Depression. I’m not placing a bet with my own house.

What would you do?

Tags: Beat Recession · Saving Tips

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