ARM to Fixed Rate Mortgage

[Joey Bresette]

Hey Guys,

I'm currently getting my real estate license in California for when I go to school out there. I'm in the last section of the pre-licensure course going over adjustable-rate mortgages (ARM). In the explanation of what an ARM is and why someone might prefer it, the course mentions that hybrid ARMs often have an initial fixed period of the loan in which the interest rate is usually lower than what you might get with a standard fixed-rate mortgage.

I was wondering if anyone had any experience or thoughts on using this initial fixed period to obtain a low-interest rate and then refinancing to a fixed-rate mortgage before the ARM is adjusted. A hypothetical comparison for example:

Say a normal fixed-rate mortgage could be obtained at 5%

Now compare this to an ARM where you could obtain a 4% interest rate for an initial period of 5-10 years. Then, before the rate adjusts to the index plus the margin at the end of the initial period, you refinance to a fixed-rate mortgage of 5%. Wouldn't you have essentially saved a substantial amount in interest during that initial period?

My initial thoughts regarding this type of mortgage structuring are that it would be more beneficial when rates are high because there's a better chance that at the end of the initial period you could refinance into an interest rate that is either the same or lower than what you would've obtained. For example, now, with interest rates as low as they are it might not be a good choice because when you go to refinance at the end of the initial period you might have a hard time finding as low of a rate as you could today, and thus you would've been better off obtaining a fixed-rate mortgage at today's rates.

So, I feel like I don't hear about this type of structuring a lot, and I'm wondering if I'm missing some things that I would only know if I had experience doing it (i.e. how hard it is to refi out of the ARM, or realistic rates during the initial period), or that I'm just not hearing about it now because it's not as appealing giving interest rates today. Let me know what you guys think! I'm sure there are many other angles that people could look at this topic.