Author Topic: When to pay off my adjustable rate mortgage  (Read 1582 times)

themagicman

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When to pay off my adjustable rate mortgage
« on: December 18, 2014, 08:23:12 AM »
My mortgage is a 5/5 ARM (Adjusts every 5 years) at 2.5%. I currently owe about $68k on it (House worth about $200k). I was wondering when you all think I should plan to pay it off. I would be able to pay it off in two years if I tried. I could also pay it off right at the 5 year mark (About 4 years away) and take advantage of the 2.5%. There is an adjustment cap of 2% every 5 year and the adjustment is based on 2% higher than the 5 year treasury rates at that time.

What would you all do? I have plenty of excess cash flow to max out retirement accounts and then do this.

1. Pay it off ASAP (About two years)
2. Pay it off at a rate that would pay it off right at the 5 year mark
3. Pay it off at a rate that would pay it off at the 10 year mark
4. Other

Also the life time max of the loan is 7.5% and it is a 30 year mortgage. So after the first 5 years it can go up to 4.5% then after 10 total years 6.5% and then 15 total years 7.5% And can also go down at the same rate (Max 2% a year)

What would you all do?

themagicman

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Re: When to pay off my adjustable rate mortgage
« Reply #1 on: December 18, 2014, 08:30:46 AM »
One other thing that I forgot to add is that we will not itemize on any of these situations, so there are not tax implications!

epipenguin

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Re: When to pay off my adjustable rate mortgage
« Reply #2 on: December 18, 2014, 08:31:33 AM »
If you can afford to knock it out in 2 years, I guess I am not understanding the question. I also don't understand what "taking advantage" of the 2.5% interest is. You're still paying out interest. If you think you can invest the money and earn a lot more than 2.5%, well, then you're effectively investing on margin. Would you do that normally? Take out a loan to invest?

I guess I just don't worry about ARMs as much as other people. My 5/1 ARM has been floating for over 5 years. Luckily for me, the interest rates have been in my favor. But I could afford the payment even if it floated up to the maximum percentage, thanks to the reamortization that ARMs undergo every time their rate changes.

Beaker

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Re: When to pay off my adjustable rate mortgage
« Reply #3 on: December 18, 2014, 08:34:46 AM »
I would not be in a hurry to pay that off. Even if you get the maximum adjustment to 4.5%, that's still a reasonably low rate (very low, in historical terms) and below long term market returns. The max 10 year rate of 6.5% is still probably below the market returns, but I might consider paying it off then just because market returns are risking while paying off debt is a sure thing. You'd want to consider it based on conditions at that time. 

The one reason you might consider prepaying some or all of it is cash flow management. Some (most?) ARMs take into account outstanding principal when they readjust. So if you've paid down extra principal before the adjustment, you end up with lower minimum payments. It doesn't change what the optimal long term strategy would be, but if you want a lower payment for some reason (eg, you could FIRE earlier if you had a lower payment) it might be worth considering.

yandz

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Re: When to pay off my adjustable rate mortgage
« Reply #4 on: December 18, 2014, 10:20:47 AM »
It sounds like you are currently investing the difference (vs. what you would be paying to pay it off) while your rate is so low. I would keep doing this. For me, once the rate hit 5%, I would, in a lump sum, say off the mortgage.  You will have the money from your investments. That way, while your rate is low, you take advantage of the market. When/if the rate goes up that I makes no sense to hold the debt (for me this is 5%, choose your number) pay it off.  I don't see a need to set a payoff date using monthly payments.

Catbert

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Re: When to pay off my adjustable rate mortgage
« Reply #5 on: December 18, 2014, 12:19:56 PM »
I recently re-fied a rental property with a 30 year fixed to a 7 year ARM.  I doing what is essentially your option 3.