Return to the Household Finances Forum | Post a Follow-Up

 o
Refinance ARM now?

Posted by marymt (My Page) on
Sun, Jun 10, 07 at 8:13

I am in a quandry, and I know no one can predict the future of interest rates. But I wonder what your gut instinct is.

We still have 3 more years left on a 5-year ARM at 5.25 percent. Our friend (a financial planner) is urging us to refinance now, because rates are going up and he feels this long term of loose money is reaching the end. He warns that in 3 years we could be looking at 7 or 8 percent or even worse. Our mortgage lender (it's a local company who keeps the loans) says we should wait (but of course it's in his interest -- no pun intended -- to have us sit for 3 years and be forced to refi at a higher rate, right?). The rate as of Friday was 6.25 with 1 point.

We have excellent credit, but we did buy at the height of the housing boom and even at 5.25 the payments aren't easy. We add $400/month toward principal, and if we keep that up for another 3 years, the loan amount will be down from its original $400K to $376K. Right now, at 6.25 for a 30-year fixed, we'd have to tighten our belts and couldn't make extra principal payments. At 7 percent, even with an increase in income, we will have to reign in all unnecessary spending (difficult with kids in middle school at that time). At 8 percent, it would be hard to keep the house without a substantial increase in income.

Some people say that in 3 years, there will be a new administration, a different economy, and it may even get better. Of course, no one knows.

What would you do?


Follow-Up Postings:

 o
RE: Refinance ARM now?

First off, I think you should be able to get the low 6's without paying points. You should really be shopping around. If it was me I would figure how much of a gambler I was and what the ultimate outcome can be if I won or lost. In this case if you win, I think the most you can win is to get a fixed loan at your present 5.25. I think if you look at the history of rates, it is a very long shot of getting that rate or anything near it. Historically, when rates have been down as they have been in the past few years, they have to rise again to a pretty good level before they drop. So, my gut feeling is that it will be a pretty long time before we see the rates of a few years ago.
What will you get if you lose this gamble? You've already said that at 8% you couldn't afford the house. So, your loss in this gamble is the possbile loss of your house. Put in that perspective, I would sure want a fixed rate even if it wasn't as low as I'd like. I've lived through the cycle of President Carter's administration when home loan rates reached 16 and 18%. In that scenerio, your house is gone for sure.
One thing to remember, if you are in a fixed rate it can never get any worse for you....and...if the rates drop, you can refinance.
Do you know any small banks that hold most of their their home loans? If so, consider them. If rates drop you might be able to get your rate adjusted downward for a small fee. I did that recently. I paid a $500 fee and they dropped the rate by 1/2%. This can only work if your bank keeps the mortgages and doesn't sell them off.


 o
RE: Refinance ARM now?

I'm not seeing any banks in the low 6's without points around here (Washington DC metro area) .... unless you pay upwards of $6000 in fees. (Which is like paying a point, isn't it? Aren't the fees rolled into the mortgage like points and calculated on the loan just the same?). At least that is how it looks on bankrate.com....

But I hear you -- this is what our friend is telling us. I'll see what I can get from our bank and a couple of others.

I hesitate to shop too much because I got blasted by a lender (whose daughter went to school with our son) because I didn't go with him after talking to him a long time when we bought this house; his bank didn't have the same package that another bank did -- but he said he would have met the price. (I thought, "if you think we're compatriates because of our kids, why didn't you give me the best deal in the first place?") Anyway, it made me hesitant to talk to lenders....


 o
RE: Refinance ARM now?

I'm a bit confused. We bought our house 2 years ago and we got a 30 year fixed rate at 5.25%. It sounds like you bought around the same time we did, so I don't understand why you took an ARM when the fixed rates where so low?

If you don't get into a locked rate SOON, you could very well not afford your house anymore. You said you're putting $400 per month to principal, so calculating roughly in my head, it sounds like at 6.25%, you will still be ok with the lower financed amount. a $376K mortgage at one percent higher does not translate to $400 per month more. So, I'm a bit confused as to why you think things will be tighter then than they are now.

If things are going to be tight, it sounds like you bought more house than you can afford without thinking ahead 5 years to what interest rates can be. Best to lock in.


 o
RE: Refinance ARM now?

Ignore the snarky attitude of some posters. It's not helpful or necessary.

What's the rate of adjustment and cap on your current loan?Just be sure you take the closing costs and fees into consideration when deciding whether to refi. Those can easily add 1-2% to the final price tag. There are plenty of "Should we refi?" calculators which tell you the break even point, but if you *know* you can't afford the payments and/or won't move in the next 3 yrs, then refi now. Rates are only going to go up
We've got a 4.375 5/1 ARM that resets in 2009. We considered doing a refi, but since the loan adjusts to only 6.375 the first yr and caps at 8.375 and we can afford the payments at those rates, it made more since to continue paying extra principle and refi when rates start pushing 8% or in 2009. Chances are really good we'll sell before then anyway.
Good luck and go ahead and get at least 2-3 offers so you know you're paying a fair rate. If you do then all within 30 days of each other, it only counts as one hit on your credit report (if I remember correctly).


 o
RE: Refinance ARM now?

Thank you, Angc! I was feeling a little bad after reading prior post....

What we got was an interest option ARM, for a $400K loan (back then it was considered jumbo). Minimum payment is $2204 (incl. tax and insurance) and we pay $2600. We knew we would refi, but we also knew our income would increase. I'm a little alarmed at the payments at 8 percent (if that's where they're headed) and have been trying to decide to take the gamble on them not going up that high (or going up and coming back down), or to take the 6.25 now. I may have overstated the crisis (we wouldn't lose the house; just have to live very frugally at 8 percent, and reduce the college savings).

But our ARM is based on the LIBOR index, and would cap at a whopping 11.25 percent. We knew a refi was in our future. The question is timing.

Everyone I've spoken with so far says things are going back up and we may not see the sixes again for a long time. I think the time is now.

To Sparksals -- congratulations on finding 5.25 30-year fixed. I thought I had shopped, but I had only gone to banks (not brokers) so maybe we did not get a good deal. Also, it was in April 2005 -- maybe rates dipped toward the end of the year? Regardless, it's done now....


 o
RE: Refinance ARM now?

We just refinanced our ARM this month and got 6.25 with no points and average closing costs (about 2-3% of amount borrowed)
We also did this because our house value increased and we do not have to pay mortgage insurance now.
Are you paying PMI? If you are refinancing could help you save money because that may not be required.


 o
RE: Refinance ARM now?

Scryn, I'm curious...what can run up closing cost to 2-3% of the amount borrowed? For example on a $200,000 mortgage, I wouldn't expect the closing cost to be much more than $1,500 or so if there were no points. Are they charging "fees" rather than points?


 o
RE: Refinance ARM now?

Well houses are much, much cheaper here.
so we have to pay for the banks lawyer (about 300 bucks), the title insurance (about 500 bucks), title search (maybe 80), appraisal (maybe 300 bucks), credit report fee (maybe 80 bucks) and recording fees (very by locality).

So this usually amounts to 2-3 percent of a mortgage, in our area. I guess I kinda forgot our mortgages are much cheaper. Our closing costs were about 1500 dollars, however we only financed 90000. so with everything we did pay about 2% of the mortgage.

In our area the closing costs are always estimated by using a percentage of the mortgage. I never thought that other areas may not do that.

-renee


 o
RE: Refinance ARM now?

Hi Mary,

We still have 3 more years left on a 5-year ARM at 5.25 percent. Our friend (a financial planner) is urging us to refinance now, because rates are going up and he feels this long term of loose money is reaching the end. He warns that in 3 years we could be looking at 7 or 8 percent or even worse.

I'm actually a little suspicious about the financial planner... he's not doing his math very well, it appears, in addition to not being very historically aware of how interest rates react in the markets over the long haul.

Long term rates have bumped up a bit in the last week, but short term rates actually have significant downward economic pressures. The only reason the Fed hasn't dropped the Prime (yet) is because they were awaiting (with crossed fingers) for the long bonds (long term interest rates) to climb back into their higher relative band.

Its true that nobody can guarantee exact predictions, however relative forecasts can be quite reliable.

FURTHER, the savings you would continue to accumulate over the next 3 years in your existing fixed term at 5.25 is likely to surpass the costs of an earlier refinance, even considering a point bump in rate, if that was where you refinanced now.

Our mortgage lender (it's a local company who keeps the loans) says we should wait (but of course it's in his interest -- no pun intended -- to have us sit for 3 years and be forced to refi at a higher rate, right?). The rate as of Friday was 6.25 with 1 point.

Even if the local bank is holding the servicing (who you pay each month,) they LONG ago sold the underlying loan note to Wall Street for securitization. They would certainly stand to make MORE money if you refinanced today with them at the higher yield, rather than your suspicion that they'd be losing money. The loan officer's advice is actually NON-self-serving... sounds to me he/she's being sincere in proposing to your best interests.

I hesitate to shop too much because I got blasted by a lender (whose daughter went to school with our son) because I didn't go with him after talking to him a long time when we bought this house; his bank didn't have the same package that another bank did -- but he said he would have met the price. (I thought, "if you think we're compatriates because of our kids, why didn't you give me the best deal in the first place?") Anyway, it made me hesitant to talk to lenders....

Instead of talking to retail lenders, I'd suggest you shop a good personal financial broker... someone who operates on a "transparent disclosure" basis (retail lenders can legally hide some, or even ALL of their revenues,) and who you can trust to shop & structure the best overall financing for you, matched to your long term family savings & investment goals, and including the equity forecast for your specific area.

Also, realize that there is no "best deal in the first place." Financing isn't like a toaster oven where there is a pre-set, knowable solid price/rate. Different sources may have different "appetites" for certain niches of loans at any point in time.

NON-SOLICITING EXAMPLE DISCLAIMER
One of my firms affiliate Wall Street banks just sent us an email asking specifically for up to $2MM of additional Jumbo loans this month in order for their bank to complete a securitization issuance (a recycling of money into bonds for their banking clients to then buy.) For all the loans we can generate for this particular bank, they will "sweeten the pot" by 1% to our borrowers. That wasn't available this morning, and it's GONE when the additional $2M bucket is full.

In addition, SOME of our bank affiliates will honor our "absolute best rate/fee guarantee" when our client commits to a binding exclusive representation agreement (which is not something we normally require... but which can work very nicely in our client's favor competitively sometimes!!!)

THUS... while your fellow PTA member may be a little "too close to home" to choose as a personal financial advisor (not to mention that they are constrained to only the funding their own bank offers...) it can absolutely work to your advantage to carefully find a high quality mortgage broker who operates from a financial advisory perspective.

Good luck as you proceed!
Dave Donhoff
Strategic Equity & Mortgage Planner


 o
RE: Refinance ARM now?

Dave, I'm sorry I didn't see your post yesterday. We locked in a 6.125 30year FRM (2 pts). However, with a penalty, I think we could still back out.

Our current ARM change terms read like this-- based on the LIBOR index, increases to 2.75 over that index at the time. However, never more than 1 percentage point in a 6-month period. So, in theory, our first increase in 2010 would be no more than 6.25, but in 6 more months, in could go up to 7.25. That actually gives us 4 more years before hitting the high payment numbers.

I've spoken with some direct lenders and with banks, but avoided brokers. I had gotten calls from them, but they were so pushy and there are so many bad ones out there that I just didn't want to go that route. I've seen your posts elsewhere advising people to find good advisors, but I have trouble finding recommendations (as another poster pointed out as well). I did speak with someone who is an economist by education, and he believes rates will trend up and stay up for a while. No one will predict 4 years into the future.

On the one hand, doing a refi when rates are up seems illogical, but if they are on their way to a peak and going back up to the days of 7 to 8 percent, we'll look back and think we did the right thing. On the other hand, if in a few years rates are very low again, well, we can always refinance again.

Speak now or forever hold your peace! (just kidding--this post may be helpful for others who are browsing, so add your comments....)


 o
RE: Refinance ARM now?

Hi Mary,
Well... the rates/fees on that 30 FRM aren't bad for the current market... though I'm not sure a thorough analysis of your situation would really warrent the refi.

Nonetheless... you've gone 100 yeard into the endzone already. You COULD, by the way (by law) rescind the refi within 3 business days (incl Saturday) and get all of any expended money back (no penalty allowed.) That IS NOT saying that I advise you to do so.

The bottom line is I strongly advise having a worthy analysis of financing BEFORE reaching the point of no return, or point of heavy pressure decision. If you are there... you are there. I can't (not can anyone) responsibly advise without seeing all the personal details, rolling up the sleeves, and running several what-if scenarios with you looking over the shoulder (metaphorically) to determine the legitimate best-fit.

I think we've seen the biggest upward surge in longterm interest rates over the last 2 weeks that we are likely to see again in a lnog, long time... but that's my own opinion, and I can sleep well with it at night.

YOU need to make your decisions on your own "feel"... either self-determined, or guided by financial professionals you trust.

If you're happy with the 30 FRM at 6 1/8%, then enjoy it & sleep well at night. Once you cross over the line, worrying about what "might have been" is a complete burn of perfectly good time.

Enjoy!
Dave Donhoff
Strategic Equity & Mortgage Planner


 o
RE: Refinance ARM now?

Dave, I did back out of the rate lock. Since it was in 2 days, they were nice about it and there were no fees.

Since things are calming down a bit (I've even heard from 2 sources that some expect rates to nudge down to mid-May levels within a few weeks), I've decided to wait.

I'm also hearing from others that we should try hard to avoid paying points on a refi; even though it's our forever home, it doesn't mean we'll never refi again....

Thanks for the advice.

Now, have you ever heard of a Certified Mortgage Planning Specialist? Is it just a glorified broker? (See link below)

Here is a link that might be useful: CMPS


 o
RE: Refinance ARM now?

Hi Mary,

I'm also hearing from others that we should try hard to avoid paying points on a refi; even though it's our forever home, it doesn't mean we'll never refi again....

Ehhh... I'm not sure what these "others" are actually thinking. Buying down your rate may make sense in certain situations (especially when you are convinced you want a 30 FRM.) In more strategic situations it may not.

Here's an article I wrote on it a while ago;
An Analytical Explanation of "Points"
http://www.fool.com/imo/2001/a011213.htm

Thanks for the advice.

You're welcome!

Now, have you ever heard of a Certified Mortgage Planning Specialist?

Absolutely!

Is it just a glorified broker? (See link below)

No, not in the least! The CMPS certification (and alternatively, the Certified Mortgage Planner title,) includes a significant education in financial planning from a leverage management perspective... how to effectively coordinate and match the effects of liability terms (the moving parts of your mortgage) to your properly-fit investment terms so that you aren't sabotaging your own best results.

CMPS graduates, and Certified Mortgage Planner graduates (which I am,) are educated and pass rigorous tests on the aspects that cause the rate markets to move, cause loan program terms to be designed & shifted as they are, and the effects of different loan programs in conjunction with different long term money management and investment management strategies.

While the CMPS and CMP labels are no guarantee of the personal quality of the professional... common garden-grade loan officers (broker OR retail bankers) that have neither the CMPS nor CMP designations are pretty much guaranteed to simply be "product pushers" rather than planners.

Hope that helps clarify.
Dave Donhoff
Strategic Equity & Mortgage Planner

Here is a link that might be useful: An Analytical Explanation of


 o
RE: Refinance ARM now?

Hi Mary MT (if you're still around),

Well ... how does your deal look, from this vantage point?

ole joyful


 o
RE: Refinance ARM now?

Well, my original post was some time ago - who could have imagined interest rates would have fallen into the 4s! We refinanced in 2008, I think it was, at 5.75, and again earlier this year at 4.75. If I'd had a crystal ball, I would have waited 'til our ARM adjusted and refinanced just the one time. But there was the risk that the house wouldn't have appraised to include 20% equity. So you never really know.


 o Post a Follow-Up

Please Note: Only registered members are able to post messages to this forum.

    If you are a member, please log in.

    If you aren't yet a member, join now!


Return to the Household Finances Forum

Information about Posting

  • You must be logged in to post a message. Once you are logged in, a posting window will appear at the bottom of the messages. If you are not a member, please register for an account.
  • Please review our Rules of Play before posting.
  • Posting is a two-step process. Once you have composed your message, you will be taken to the preview page. You will then have a chance to review your post, make changes and upload photos.
  • After posting your message, you may need to refresh the forum page in order to see it.
  • Before posting copyrighted material, please read about Copyright and Fair Use.
  • We have a strict no-advertising policy!
  • If you would like to practice posting or uploading photos, please visit our Test forum.
  • If you need assistance, please Contact Us and we will be happy to help.


Learn more about in-text links on this page here