Refinancing Questions

[inquisitive]

I've got a 5/1 ARM that I'm looking to refinance within the next 5 years so that I won't be at the mercy of prevailing rates at the time. Some questions:

1. How long do I need to demonstrate investment income from the property before I can use it on a mortgage refinancing application as part of my total income?

2. For the timing of the refinance, in order to save the most money, do I look at the 30 yr fixed rates or the LIBOR? Are they related at all? In 5 years my ARM will adjust based on the LIBOR but I don't think this affects refinancing rates. I remember David Bach mentioning in his book that interest rates fell substantially on one particular day and he called his agent and refinanced from Hawaii and saved thousands of dollars on his mortgage. What interest rate was he following? Does anyone follow interest rates daily?

3. To compare companies to get the best deal, can I just look at the interest rate and the time period (with new mortgages, looking at just the interest rate/time period is inaccurate because of varying closing costs, which can make the lower interest rate the more expensive loan in the long run, but all closing costs can be wrapped into the loans for refinancing)?

4. What is the role of the appraisal in the process? I just have to show that the house is worth at least the amount of the mortgage and can choose the cheapest appraiser to do this, right? If the house is worth more than the mortgage I'll just get refinanced to the amount of the mortgage.

5. Does Penfed have the best rates for mortgages or should I check into other places?

6. Does the deal I get depend on anything besides my credit score and the current rates? Do they look at the amount of equity I have (I am paying only interest right now)?

Thanks in advance for your insightful comments.

 

[W2R]

With as many question as you have, I'd recommend finding a reputable mortgage broker who has been doing business in your area for many years and comes with good recommendations. Then *negotiate* the interest rate (the interest rate that the mortgage broker tells you right off the bat will allow quite a bit of room for negotiation). Good luck.

 

[HpRyder]

1. How long do I need to demonstrate investment income from the property before I can use it on a mortgage refinancing application as part of my total income?

At least 1 year. It has to show on Sch E of your tax return.

2. For the timing of the refinance, in order to save the most money, do I look at the 30 yr fixed rates or the LIBOR?

How much risk do you want to accept. The LIBOR fluctuates daily and depending on your mortgage contract your interest will change depending on what the LIBOR is at the time the contract specifies a reset.

A 30 yr fixed rate is fixed for 30 years, no changes.

Only you can determine your risk level.

Are they related at all?

Of course they are related. The London Inter Bank Offered Rate (LIBOR) is the rate banks lend to each other. So a mortgage interest based on LIBOR will depend on what bank charge each other to lend. I don't think there are any 30 yr fixed rate mortgages based on LIBOR. The 30 yr fixed is based on 10 year TBill rate.

I remember David Bach mentioning in his book that interest rates fell substantially on one particular day and he called his agent and refinanced from Hawaii and saved thousands of dollars on his mortgage.

True. The most recent time was about 3 months ago when mortgage interest rates fell to 4.5% for 30 yr fixed, no buy downs. When the Fed announced it was buying $1.5T mortgaged backed securities(MBS).

What interest rate was he following?

As him.

3. To compare companies to get the best deal, can I just look at the interest rate and the time period (with new mortgages, looking at just the interest rate/time period is inaccurate because of varying closing costs, which can make the lower interest rate the more expensive loan in the long run, but all closing costs can be wrapped into the loans for refinancing)?

Sure, but exactly how much time each day do you intend to spend doing this survey? Why not just cue on the loan APR as a proxy for these costs?

4. What is the role of the appraisal in the process? I just have to show that the house is worth at least the amount of the mortgage and can choose the cheapest appraiser to do this, right?

Nope. The lender choses the appraiser, not you, to independently evaluate the property value and you pay for it.

If the house is worth more than the mortgage I'll just get refinanced to the amount of the mortgage.

Wrong again. The lender decides the loan to value (LTV) they are willing to accept. And that is the loan amount they will lend. If its a rental property 4 units or less, expect LTVs on the order of 60-70%.

5. Does Penfed have the best rates for mortgages or should I check into other places?

What happened to your daily lender survey motivation. Of course you should check more than one lender.

6. Does the deal I get depend on anything besides my credit score and the current rates? Do they look at the amount of equity I have (I am paying only interest right now)?

You bet. They look at everything, including salary and reserve cash, and you have to document it. Tax returns, W2s, bank statements etc. You name it, they want it documented and verified.

You had better do a lot more data gathering, independent of this site, to understand the process. Or it will cost you big bucks or perhaps a bankruptcy.

You might want to start with this site:
www.mtgprofessor.com/Wholesale Price Data/today's_prime.htm

 

[jimnjana]

Depending on how much you owe/value of your home you may be better off with a home equity loan via PENFED. Low rates ,20 yr payback and virtually no closing costs. You may be tempted no to re-finance since you have a few yrs to go before your rate will change. I'd recommend you consider doing it soon. While no one knows where rates will be in 5 yrs, my bet is that they will be higher.

Jim

 

[inquisitive]

I think I did not state my question properly. Regarding the LIBOR vs. prime rate, I meant which one of these determines the cost of getting a mortgage. I suppose if I wanted an ARM I would follow the LIBOR rates and if a fixed the prime rate.

Right now it wouldn't be a good time to refinance because I have little equity and my credit score and income are not great. But I am starting to rent it out this year and am going to work on my credit score for the next several years. My plan is to refinance to a fixed mortgage at that time. Thanks for the info everyone, esp. HpRyder.

 

[inquisitive]

The prime rate does not change daily right? So if someone is following interest rates to decide when to refinance a mortgage, once the rate decreases there is always going to be a several week and probably several month period in which to do so?

 

[HpRyder]

The prime rate does not change daily right? So if someone is following interest rates to decide when to refinance a mortgage, once the rate decreases there is always going to be a several week and probably several month period in which to do so?

Only some ARMs are based on the Wall Street Journal printed prime rate, others are based on the LIBOR. 30 year fixed mortgages are based on 10yr T Bills. I know the LIBOR & T Bills change at least daily, I'm not that familiar with prime rate changes. But your best bet is wait for a dramatic Fed intervention in the mortgage market, then jump on any low rates which appears during the turmoil. The last time this occurred was about March 19, 2009. The low rates lasted a long as 12 hours. What last s several weeks or several months are small rate fluctuations. While cumulatively they may or may not be a drop, the substantial drops occur suddenly and infrequently, lasting only hours. And you cannot mistake the event.