Thinking of refinancing my mortgage (1 Viewer)

[mylan]

Due to all the financial uncertainty, We have been considering refinancing our hybrid 7/1 ARM into a 30 yr. fixed. It doesn't reset for another three years but I wonder where rates will be then.

Presently the rate is 5.125% but will adjust up one percent in the eighth year if I don't refi and one more in the ninth, it is a great rate now but how about three years down the road when we have to do something about it. We also have an equity loan that will be paid in 2 1/2 yrs. but if I combine it with a new loan, we will "save" about $500 a month.

I have had one quote so far of 6.25 with 7/8 of a point, we're already approved and the closing date would allow us to skip two months plus, like I mentioned before, free up $500 a month which is something that would help greatly. Good idea or bad?

 

[Mort Corey]

Yes. (sorry, couldn't resist). If you plan on staying put for five or more years I'd think it's a good time to refinance. Interest rates have been slightly lower but chasing a quarter or so percentage point isn't worth the risk.....at least it wouldn't be to me. JMO, but in three or so years I believe the look for interest rates is up.

Mort

 

[Stan]

With the info provided, especially "saving" $500 per month now with a refi, I'd definitely get rid of the ARM.

I don't know what a hybrid 7/1 is, have always avoided ARMs, but anytime you see the word adjustable in financial terms it almost always means adjustable in one direction only, up.

Another possibility would be to take the $500 savings each month and apply all or part of it to the principal of the new mortgage. Extra principal payments, particularly in the early years of a mortgage can have a tremendous affect the number of years til payoff and the amount of interest.

You've got a pretty good deal for the next few years, but if you plan on staying a while, looks like a good time to get out of the ARM into a fixed at a decent rate.

 

[mylan]

We will likely stay here for awhile, at least till the original loan term expires so we would be looking at a refi anyway in three years.

I agree, I tend to see rates as going up and staying that way for a long time while the recession plays out. Refinancing today would give me peace of mind in that event and give me wiggle room without the extra $500 coming out every month. If rates do go down, hey I can always do it again.

A hybrid ARM stays the same for a set period, in our case seven years, and only then does it adjust but it does so at a known rate set out in the original loan. Ours will reset up one percent for one year and then up one more in the ninth year unlike a normal ARM which fluctuates wildly, I would have never considered one of those.

Thanks for the replies, keep them coming. My wife is not entirely sold on the idea so I need ammo.

 

[Bob McLaughlin]

We just refi'd to a 30-year fixed with no regrets. If you're going to free up $500 a month I say go for it. Our situation was that with a second kid in daycare, we were just cutting things a bit too close each month. Rising energy costs and healthcare was eating up a lot of our cushion. In a few years we can always refi again if the situation dictates.

 

[Edwin-S]

I'd say that you answered your question in post #4. You should follow the course that makes you feel the most comfortable; although, I cannot figure why you think interest rates would go up during a recession. I would expect them to go down because lenders would be scrambling to compete for business from the few people who would still have jobs and the financial ability to borrow.

 

[mylan]

My reasoning behind the increase is that this is no ordinary recession as it is tied to housing as well and the fact that Fannie and Freddie have been taken over by the feds and are going to be regulated like never before. I think rates may go down and then began a steady climb to about 7% until this current mess is behind us, this is really an educated guess, I could be wrong but like Mort said, I don't want to chase a quarter percent around when I could go ahead and get it done now and get on with my life.

I've gotten two call backs and the rates are similiar, 5.875 to 6.125, one from an out of town bank and one from a local broker. Wells Fargo, the out of towner, told me we would close in my home (?), the local broker told me in Georgia, an attorney is a law so the Wells deal seems fishy.
Oh yeah, my wife seems to be onboard with this too so it looks like we need to get moving on this.

 

[Quincy]

I closed on a loan once in my home(2nd mortgage), it was no big deal. The person who came to the house was a Notary Republic and I just read and signed the papers and the loan was done. I believe the bank was Chase but I can't remember.

 

[Dennis Nicholls]

Well I saw this coming in 2005. I sold out and then got the ultimate mortgage rate on my new home here in Boise. 0% interest rate fixed, no points.

How do you qualify for that rate? Simple. Put 100% down.

The best way to live is still to move to where the cost of living is cheap compared to where you lived before.

 

[Dennis Nicholls]

A notary public is merely someone who has been certified to swear out oaths in that state. He/she has no knowledge about the facts of a case. He/she merely is permitted by the state to administer an oath that the signature is acting under an oath.

 

[mylan]

Yeah I know, you timed the market well grasshopper, we O.T.H. did not, nor did we live in an insane state for appreciation (CA.), nor have we had the original loan for years as you did, this is our second house, four years in.
What we did do right, I.M.O. was to sell in 2004 at close to the top of the curve but what we should have done then was to live in the apartment until about 2007 and then built our custom home, and, oh yeah, a crystal ball would have been nice too!

 

[Todd Hochard]

You're late 50s, right? Retired?

How is this good advice for a 30-something with two kids who needs to live where the work is?

Back to the question-

ARMs are usually tied to an index, and longer hybrid ARMs don't automatically go up at the end of the fixed period. Is yours not tied to an index, or are the terms very unfavorable?

I have a 5/1 ARM tied to the LIBOR that will begin adjusting in 2010, and I'm waiting it out. For a couple of reasons-

1. Up until this month's sharp rise in the LIBOR, my rate would have actually gone DOWN if it adjusted this year.
2. I'm still not 100% certain of staying beyond early 2012. As such, even with a rate rise in 2010, and another in 2011, my "break-even" point on refi fees and rate differentials is at the end of the 7th year.

It sounds to me like the real reason is to free up $500/mo in cash flow.

 

[DaveF]

I'm curious about the quotes around "save" for the $500. Is this really a savings or cash flow management that will cost you more in the long run?

Whenever possible, I'm a fan of reducing long-term costs; paying off consumer debts in the short term rather than financing them into hidden, but expensive long term debts.

As for refi...it's oddly hard to predict the future. But at 6%, rates have only been 2% lower, historically? But they've been 12% higher? So it I'd guess that the risk of much higher rates is worse than the chance of much lower rates.

 

[Phil Kim]

How many more years do you have left on your 5.125% 7/1 ARM mortgage? Are you able to pay additional principal each month?

5.125% to 6.25% (with 7/8 point) is a hefty increase. I am sure you know, but $500 "savings" come from borrowing less money than you did earlier. In terms of monthly interest payment, you will be paying significantly more. So there isn't any savings to speak of really.

If you can pay additional principal balance, refinance to another 7/1 ARM. And be sure to ask all the closing costs (if any) to be converted to tax deductible point. You will likely get more favorable rate if you can pay off the equity loan.

 

[Brian Perry]

If you have three more years at 5.125, and then one each at 6.125 and 7.125, that averages to 5.725 over five years. I'd probably sit tight with that instead of refinancing at 6.25 plus 7/8 point.

 

[mylan]

I'll answer without quoting everyone (to make it easier on me)and i'll try to explain where I'm at with this:

Yes Todd, Dennis likes to gloat, we should all be in his position but very few of us are.

Dave: the quotes around save indicate that I know i'm not saving anything but rolling the second into the first. I realize this is going to cost more in the long run but, yes, this is to free up $500 a month.

Phil: We have three more years on the ARM and then it resets up a percent and up another in the ninth year.
No, we are not able to pay extra with expenses we currently have, thus the need to free up the cash.

This is what has lead us to this point:
We sold our first house at a good profit which we then put down on our "dream" custom home. The first mistake we made was to buy a bit too much house, thinking it would be the last one and we wanted to get it right. We didn't go wild like some people have but go over we did. Total housing costs were about 40% of gross income. The second mistake was to refinance the second to furnish our new "dream" house and consolidate some bills incurred just after construction which we never expected nor budgeted for such as electrical runs for the pool which was never in the original quote and a fence for said pool.

I think we just got to the point of not wanting to be so pushed at the end of the month so we are doing something about it, we have bundled our cable tv, internet, and phone for a savings of $75 and this will free up another $500-600 a month and are actively seeking other ways to cut back. My car will be paid off in eight months and that will be another $500.

Some good news in all this is that apparently our credit rating is still solid, we have been pre-approved over the phone for the best rate possible, and according to one lender who has pulled comps and seen the neighborhood, our house now appraises for $50,000 more than we paid. The rate also went down to 5.875% with no points.

 

[Mort Corey]

Are you saying that your housing costs are 40% of your income? Just seems like quite a lot. Maybe I'm misreading it.

The no points under 6% sounds like a bargain to me....but then again, when I bought my first home in the late 70's I was happy to get a 13%+ loan (and my wife was a VP at the bank)

Mort

 

[Bob McLaughlin]

That's simplistic (and frankly, it sounds pretty rudely self-satisfied). If I followed advice like that, I'd still be skinning muskrats in my father's basement for $2 per hide for a living, I'd have no wife and no kids and no house. Sometimes you need to go into debt to get started in life--be it student loan debt or a mortgage. Debt for a house is still smarter than paying rent.

 

[mylan]

I might have exagerated a bit but I did mean total home expenses: mortgage, the equity line, utilities, and things we did ourselves like landscaping. They sodded the front yard but we planted shrubs and finished it. The first year was kinda rough.
Our income has risen over four years so we are at about 25% but other expenses have taken hold. It has become rough again.
Bottom line is I am tired of that equity line at 6.99% and know that we are going to have to refi sooner or later so I am leaning sooner.

 

[mylan]

Yeah, one of these days i'll be old and retired too but in the meantime I got issues just like everyone else. i'm just trying to reduce our monthly expenses now so that we can breath a bit easier so that we don't start down that credit card road to hell. I would rather owe a mortgage than to that any day.