This post over at Basically Money (now a member of the new family of Stack Exchange sites) asks whether to refinance a mortgage. Here's the question:
I have a 5-year ARM at 4.5% APR. I can renew the rate at 3.25%. However, the cost of is going to be $800. The current loan value is $156,219. Is it worth it for me to do the rate renew? How long would it take to recoup the $800? I am planning on refinancing at (or selling the home before) the 5th year.
Please, I do not want this to degenerate into a discussion of how ARMs are not good, etc. Let's just assume I know that a 30/15 year mortgage would have been “smarter”.
I bolded the last section because this person knows the risks involved in taking on an adjustable-rate mortgage instead of a fixed-rate mortgage. The initial rate is lower, but that's because after a certain number of years (five in this case) the interest rate floats to a new amount based on the prevailing market rate, and can reset periodically for the rest of the life of the mortgage. The borrower assumes the interest rate risk instead of the lender.
The questioner discloses that (s)he plans to refinance or move within the initial lock-in period. But one of the comments beneath the question (by Jim) is interesting:
Despite your note, an ARM is a really good idea for your time frame. Rates are going to be low for a long time.
Rates are going to be low for a long time? That's a bold statement.
Mortgage rates are incredibly low now. Tightened lending standards have decreased demand, and lenders have had to compete for these fewer qualifying borrowers. Rates have gone down to meet this demand.
Now, how long they'll stay as low as they are depends on a few things, such as how long the overnight lending rates at the Fed stay low, how long banks continue to have strict lending standards, and how long consumer demand stays low. Basically, as long as demand for mortgages is low, mortgage rates will remain low, all other factors being equal.
Could demand remain low for months? Years? I don't know. A recovery would get people borrowing again. The homebuyer incentives worked while they were active to spur sales, but they're gone. It will take something else to see them up again.
Rates are low. I wouldn't want to guess when they're heading up again from their historic bottoms.
