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For example, what is the present payoff on your home (this is the amount you would re-fi at current fixed rates)?
What is your current rate? When your rate rises, what does it rise to - you say it can go as high as it wants, but this is not true. What it can do, in the initial raise, is go the prime + x% limit specified, but it should not be able to go higher.
ARM's are genreally indexed to the prime rate. Further, the 2% annual limit is a maximum annual limit - it cannot arbitrarily go up 2% each year, and in fact, could go down if rates were to fall. This 2% limit actually protects you - if prime were to rise more than 2% in a given your, your rate increase is capped at 2%.
What rate could you get today? Most fixed rates are still around 6% - not a bad deal at all, and certainly better than the rate you are likely to pay when you have to refi, if it is several years out.
How long have you been in this ARM? How long until rate increases affect you?
What will your fixed costs (origination, appraisal fees, etc) be if you re-fi?
Ideally, you should run a payoff projection under all scenarios you are contemplating - assume a fixed over 30 years, total cost to payoff, plus the fees, gives you the total cost of the house over 30 years.
Do the same thing with some logical assumptions for fluctuating rates over the same period - you can set these up easily using excel.
The method that costs less over the life of the loan is the choice you should make.
Alternatively,if you have life left on the fixed rate period, and you do plan to sell, you are better off paying principle down as you are now. This builds equity.
If you plan to kepe the house, you should bite the bullet, accept the short-term fixed costs, and refi while rates are still at historic lows.
Keep in mind, whatever you're paying, rates can reach into the teens....
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