About 1.5 years ago I bought a home at auction. I paid about half of market value for it and made a large down payment. I could have paid cash for the home at the time, but it would have wiped out all cash reserves, so I financed about $30,000. Prior to that, I always paid cash for everything and I had no credit cards. When I applied for my mortgage and my credit was checked, I came back with no credit. It wasn't that I had bad credit, I had no credit. I checked with a few lenders and the best I could get at the time, due to my lack of credit, was a 5.75% ARM for 15 years. I didn't like the idea of the ARM mortgage, but realizing I was only financing $30,000, the loan was locked in at that rate for the first three years, can only adjust 2% per year after that, and can only adjust three times over the course of the loan, I went with it. My thought was even if it went up to 11.75%, by the time it adjusted to that, I would owe significantly less therefore reducing the actual amount I would be paying in interest. I now have a 740ish credit score. I owe about 25k on the loan. I have enough to pay that off if I would like too, but I am not sure what would be best at this point.

Part of me says pay it off and be done with it. That would be nice, but it would take a very large portion of my cash on hand. I have also considered refinancing the loan for a much lower rate. I have been told I could possibly get a 2.75% rate if I refinance for 15 years. This would only drop my current payment by about $65 per month, but it would prevent my interest rate from increasing, thus saving me much more money in the long run. Because the home was appraised less than two years ago, I don't know if I would be required to reappraise to obtain a new loan. I also don't know what closing costs would be. I definitely like the idea of paying the loan off, but if I can refinance at 2.75%, I would feel more comfortable doing that and being able to keep my current cash on hand available in case I need it for unforeseen expenses or investment opportunities. I don't honestly know that a lender would even be interested in giving me a mortgage for $25,000. Could some of you guys with some experience or thoughts regarding my situation give me some input please?? Thanks in advance. By the way, I have a child starting college in 3 years and another in 5 years if this might influence you thoughts at all. Thanks again.

I'd find out what the closing costs on the refinance are going to be.  If its going to cost you 2k to refinance, is is worth doing anything at all.  If it was me i'd take half of the money you were going to pay it off with and throw that at the loan, then use the next year to build reseves back up and then kill it off next year.  That's just me though.

Why not just double up on payments? The second one going to principle only?. Instead of paying closing costs?

I would refi and keep cash on hand provided that your closing costs were less than one month's payment

Refinancing could cost you $2000 or more.  Probably not worth it for a $25,000 outstanding balance.

If you can afford to pay more every month, say an extra $800 in principal, you could get this knocked out just before child #1 goes to college... freeing up your income to send to the University instead

Do shop around, I got a 2.75% 5 year mortgage for only $900 in costs.  My LTV was good enough they didn't require a full (and expensive) appraisal, just a "drive by" where they make sure your house isn't burned down..  Banks/credit unions that do their paperwork in house and keep the loans can cut you much better deals in these situations.  Brokers who want to sell the loans to the next suckers have to do a lot of documentation to ensure they have a compliant product to sell.

I am already paying about half a payment extra per month toward my loan. With the current loan rates and the state of the economy, I almost feel better with my extra money in my hand, and a lower rate. I am just looking for other people's thoughts right now.

totally agree

don't fuck with the fraudsters, errr banks, anymore than you have to.

Pay it off.

If you are going to have debt, a mortgage is the best debt to have.

You don't need debt.

If you want to build credit, get a credit card, or finance a car, AFTER the house is paid off, and you have some reserves built back up.

Invest some of the money that would have gone toward the house payment. Keep some "liquid" just in case.

These questions would be much easier to answer if we had a crystal ball to tell us the interest rates, stock market returns, and your employment prospects over the next 15 years

If I were in your shoes, I would figure up how much money I would need to survive 6-12 months, just to pay for food, utilities, insurance, and the mortgage payment.  Then I would send the balance to the bank and continue to make additional principal payments until the mortgage was paid off.

Don't focus too hard on the rate to the exclusion of everything else.  You gotta math this all the way out.  $2K to fees alone is a bunch on a $30K loan.  It will take a while to get to that 2K in interest savings alone especially if you pay off half the loan this year.

Go to one of those on-line calculators and play around.  You are already paying ahead so your loan won't be for the full time period anyway.

See if you can roll the closing costs into the loan.  If the monthly loan payment is still less than or close to what you're paying now, go ahead and get it to lock in the rate.  The bank will have the only claim on the property, so they should be willing to loan you the money with all of you equity in the house.

It's good to have available cash on hand in case you have a need for it - medical, car, etc.

Right now arms that are coming due are dropping to around 2.75%

While that may be true, right now is a bad time to be taking out an ARM.  With QE3, it is not a question of if inflation hits, but when.  Interest rates will rise to stave off inflation, bank on it.   Someone said it is like 1979 all over again. How true.

I was told by my bank that I should expect my rate to increase regardless of what rates are currently at.

I really think it has to do what your arm is tied to, my cousin is tied to T-bills what is about zero now and he pays Plus 2.75% and his payment went from $1200 down to $856 now .
I know his came do like 3 years ago and every year it dropped so he is waiting to refi if needed.
he told me about this about a week ago thats why I know about his loan.

Not a expert but I think it would be higher if tied to the Libor rate

I will have to check my loan documents and see what the rate is tied to. I appreciate the advice from everyone.