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Refi Question
Old 11-27-2008, 05:40 AM   #1
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Refi Question

I currently have a 5.67% 10 yr ARM on our second home that adjusts in about 7 yrs. I'm thinking of refinancing our paid for primary residence to use funds to pay this mortgage off. At the time I refinanced to the present rate I was using the property as a rental. I know the general rule about if you can lower your rate by 1% it may be beneficial to refi, in my circumstances I just want to eliminate the uncertainty of future rate direction. I have plenty of equity in the primary residence as home prices in our area have held up better than average. I would have to bring money to the table to refi 2nd home as property values in florida are down. So I think I should wait for rates to drop further but I think the time to refi will be coming soon perhaps in 2009. Refi now, or wait a bit longer thats the question ... thanks

Jim
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Old 11-27-2008, 08:17 PM   #2
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I currently have a 5.67% 10 yr ARM on our second home that adjusts in about 7 yrs. I'm thinking of refinancing our paid for primary residence to use funds to pay this mortgage off. At the time I refinanced to the present rate I was using the property as a rental. I know the general rule about if you can lower your rate by 1% it may be beneficial to refi, in my circumstances I just want to eliminate the uncertainty of future rate direction. I have plenty of equity in the primary residence as home prices in our area have held up better than average. I would have to bring money to the table to refi 2nd home as property values in florida are down. So I think I should wait for rates to drop further but I think the time to refi will be coming soon perhaps in 2009. Refi now, or wait a bit longer thats the question ... thanks

Jim

do you think rates will continue to drop? if so,wait.nobody has that glass ball that tells all....but if it helps,i'm waiting here in ohio for another 1% drop before i refi....i dont think rates will be climbing soon....and i dont think rate drops are over from the fed....and to re-kindle the fire that once was a housing market, lenders will be lowering rates over the next year,imho
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Old 11-28-2008, 07:28 AM   #3
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how many years are left on the 10yr ARM and how much is it allowed to adjust upward? Is it a balloon loan or are you paying down principle along the way?
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Old 11-28-2008, 11:08 AM   #4
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how many years are left on the 10yr ARM and how much is it allowed to adjust upward? Is it a balloon loan or are you paying down principle along the way?

it adjusts in about 6.5 years, its not a ballon becomes adjustable every year at that point. I think caps are 1.5% annual 6% total upward.

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Old 11-28-2008, 11:57 AM   #5
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Another important factor is whether your ARM is interest only? If it's interest only, then you might want to consider paying down some of the principal as you wait for rates to drop a little bit lower --that 5.67 rate appears pretty good these days.

The uncertainty you're trying to eliminate is a potential upward move in interest rates, which given the remaining 7 years left appears to be very likely, though the 1.5 percent cap is very good -- you sure it's that for the initial increase, as many ARMs have an initial adjustment that is above the subsequent annual caps? On the other hand, it's always possible for us to have a very prolonged period of lower interest rates -- though I doubt it will stretch for 7 years, unless we morph from recession to depression.

What exactly is your ARM indexed against? My ARMs are indexed against one year treasury constant maturities, which is at 0.95 percent as of 11/25/08, so the reset at the current index would actually lower my interest rates to 3.7 percent, a big drop from 6.0 and 5.375 interest rates. Unfortunately, I don't get reset until 10/1/2011. I'm looking to drop these ARMs if I can refinance at fixed rates below 4.5 percent, otherwise if I can't get a lower rate, I'm willing to float with the reset in 3 years and pay down a lot of principal until reset so that any major upward increase will be against a lower principal.
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Old 11-28-2008, 12:28 PM   #6
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it adjusts in about 6.5 years, its not a ballon becomes adjustable every year at that point. I think caps are 1.5% annual 6% total upward.

Jim
That should be easy enough to calculate. At the point that the loan can adjust, you will have 3 years left... which should mean that you have little principle left (unless you bought something very expensive). You can calculate your maximum cost with 3 years of 1.5% increases.

I doubt you will find a fixed loan today for much less than your 5.67%.... look and see what kind of rate and closing cost you can get.

Then calculate your max cost using your current loan in the last 3 years.

(unless I am misunderstanding)
Year 8 could be max 7.17
Year 9 could be max 8.67
Year 10 could be max 10.17

Then do the math.
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