What should Mark and Carol due?

Mark and Carol Doe called me today. They purchased their home several years ago and wanted to talk about getting ready to sell in the next couple of years. Mark told me they would like to sell today but there not in a financial position to do so due to the current housing market.

You see they have outgrown their home. Their two kids are getting bigger and they need more space. So what can they do to prepare for the move when it comes?

Let look at where Mark and Carol were and what they decided to do. Currently their 30 year fixed rate is 5.875% and they have 25 years left on the mortgage. They owe about $246,000 so their principle and interest payment is $1565. In two years they will owe $236,808.

They really have two good options:

Mark and Carol could go with a one year ARM at 4.5%. We keep the mortgage at 25 years and this gave them a principle and interest payment of $1365 per month which gives a savings of $200 per month. Since our closing costs are only $330 they are $2070 ahead after one year.

Then we assumed that the rate would go up to 5.25% in year two which would give them a principle and interest payment of $1461.50 or a savings of $103.50 per month or a savings of $3312 over the two year period.

Additionally, since the payoff on the loan they have currently would be $236,808 and the new loan payoff would be $235,400 they save an additional $1408. This gave Mark and Carol a total savings of $4720 over the two years they plan on being in the home.

A second good option we discussed was a 3/1 ARM at 5.25%. This gave them a fixed rate over the next three years so has a little additional feeling of security which increases the rate.

The principle and interest payment on the 3/1 ARM is $1352.50 the payment is lower because the 3/1 ARM has to be amortized over 30 years. So in this case over the two years they save $4770 after paying the $330 in closing costs. But they will owe $238,900 at the end of the two years so there total savings is $2500.

Mark and Carol decided on the one year ARM feeling the greater savings made up for the lower sense on security.

Do you think Mark and Carol made the correct choice?