Answer

Three years ago I asked your advice on refinancing a $35,000 mortgage and you suggested a home equity loan. The home equity route saved me from paying closing costs associated with refinancing. Thank you for that advice.

My wife and I are now in the process of buying a new house. Once we sign the purchase and sales agreement we intend to put our current house on the market. We will be putting 20% down on the new house and taking out a mortgage for the remaining 80%. We anticipate having a $100,000 balance on the new mortgage after selling the current house and applying the proceeds towards the new loan. At that time we plan to take out a home equity loan (4.87%) to pay off the new mortgage. What type of mortgage do you suggest that we apply for to secure the new house during this interim period? My inclination is to obtain a one year ARM. The specific advertised loan that I'm looking at lists an interest rate = 2%, points = 0, APR = 3.733%, Index = 1YTB, Margin = 2.75%, Lockdays = 60. They also advertise Total Estimated Non-Recurring Closing Costs = 0.

What do you think of one year ARM's for short term loans? Do these types of loans typically contain hidden fees such as early pay off penalties? What is the significance of the margin? Are there any better options that I should consider?

You need to ask lots of questions and read the fine print carefully about ARMS. Some of the newer ones today do not have as many caps on rate adjustments as those in the past did. It's definitely "buyer beware." A key factor, in addition to cost, is how long you plan to stay put. If it's more than a few years, you are taking on lots of risk (of future rate hikes) with an ARM. A fixed rate loan might be better. Find out what the "highest possible cost" with an ARM could be with the maximum rate hike. Could you afford it? If you plan to be in your home 7-8 years or longer, it is generally better to pay a few points and get the lowest fixed interest rate possible because you'll be making payments a while.