Should we get refinance our existing mortgage into an interest only
5/1 ARM loan or a fully amortized 5/1 ARM loan?

We currently have a mortgage of $530K with an Option ARM. This loan
adjusts monthly and the current rate is 6.623 or so. We pay the
interest only option on the ARM, however we frequently, pay additional
fees towards principle. The mortgage is for 79% of the value of the
home. We are looking at 2 options. There is no penalty to get out of
our existing loan,.

1. ING Direct: 5.95 for $500K 5/1 ARM fully amortized at $695 closing
costs; the payment would be $2982 (principle and interest). Plus, we
would have a HELOC for 8.75% for the remaining amount of $29871 and
the interest only payment would be $222/month. Total monthly payment
of $3204. No penalty to get out.

2. Our existing mortgage holder is Washington Mutual. They are
offering an adjustment to our mortgage to turn it into a 5/1
ARM--Interest Only. The payment would be about $2925. No penalty to
get out and no paperwork to make the change. This is not considered a
refinance. The cost of this change is $795.

Note: At the rate of increase we have been experiencing on our current
loan, we will be paying $730 more per mont by year end. In other
words, our monthly payment has gone up at least $60 per month.

Those interest only ARMs seem like a bit of a trap.  Have you
considered a 30 year fixed rate mortgage?

$530,000, 30 years at 6.5% interest is $3,320 per month.  That's only
a little more than you're paying now, and your rate is fixed (I think
we can agree that your rate will go up with an ARM).  Also, you will
be building equity in your home if you're not in an interest only
loan.

Thanks for taking the time to respond. 

I don't plan on being in the house for more than 2 more years. Hence,
why would I pay more than I need to?  The fully amortized 5/1 ARM is
fixed at 5.95 for 5 years and it does pay at least $500/mo in
principle. Perhaps I'm missing something?  At this point we're leaning
away from the interest only ARM.

Hello Rachael,

ING Direct is a great lender but I dont think that $695 is all you
would have to spend if you were to do a refinance with them. Their
lender fee might be $695 but I dont think they will cover title
closing fees, appraisal fees, mortgage registration fees and taxes. Im
not sure if they are offering to pay for those fees themselves, but
generally that would include a prepayment penalty to make sure you
wont sell the house anytime soon. In this case they dont have one, so
you might have confused the lender fee with all of the closing costs.

If Washington Mutual is offering to do this change for $795 and not
consider this as a refinance then I would consider them a primary
target. As you've done before you can always pay a bit extra towards
principal as well.

Another thing to consider is the HELOC with ING. HELOC's arent stable
either as they adjust by the prime rate. We all know what's been going
on with that for the last two years.

Conclusion:

If in fact the full cost of closing with ING will only be $695, then
they are a great option. Otherwise you would be spending several
thousand to change it over to an ARM and would definitely go with
Washington Mutual.

Good Luck!

I am a mortgage broker and have been for 11 years.
Take the Wa Mu deal- it's ok to take an interest only loan because you
can always pay more each month.  Anything extra you pay can go towards
principle.  I would not recommend an equity line now unless you need
the flexibility of borrowering against it at a later date.  Fixed rate
2nd mortgages are about the same interest rates as the equity lines.

there is a great company that i have used and they will provide you
with free help and advice, you can contact them at www.hamptoncole.com
i hope this helps.