My Va Hybrid 5/1 Details... Good Deal? (PMI, loan, fixed rate, interest)

[Night Surfer]

Hi everyone...

I am trying to learn about mortgages (checked out a bunch of books on them) but in the meantime I would very much appreciate some feedback on the 5/1 VA refinance that we are considering.
We bought our house at the perfect time almost 9 years ago (right before everything went crazy) for $150K (total of loan: $154K) on a VA 30 yr fixed zero down. We refinanced 1 year later to get from 6.625% to 6.0%.
So currently:
Rate: 6%
Principle Balance: $138,291
Monthly payment: $1236 (includes escrow - taxes/insurance)
My Credit Scores: 759, 776, 747
My Wife's scores: 774, 751, 773

Loan Details:
5/1 Hybrid ARM LIBOR (VA)
30 Yr
3.5% Locked for 5 Years
$147,735
$500 Appraisal fee (paid by me out of pocket)
New payment: $934 (also inclusive)

Details of Transaction:
Refinance: $138,291
Prepaid: $3,909 (what is this?)
Closing Costs: $3,981 (good deal?)
PMI, MIP, Funding Fee: $738.67 (what is this?)
Lender Credit: $275 (?)

Caps: Adjusts after 5yrs: cannot increase or decrease more than 1% after the initial period and adjusts every year after that (Max 1%).
Interest can never be greater than 5% over the initial rate (8.5% cap).
So: 1st Adjustment Cap: 1%
Annual Adjustment Cap: 1%
Lifetime Cap: 5%

Re-amortization: After the initial 5yrs the loan recasts every 1yr and payment is adjusted to reflect actual principal owed.

No pre-payment penalty.

On the Rate Lock Disclosure:
Loan Amount: $147,735
Interest Rate: 3.5%
APR: 3.047% (what does this mean?)
Margin: 2.25
Current Index: 0.25
Origination Charges: $1,977.35 (what is this?)
Discount Points: $738.67 (this is actually for non-allowables)(?)
Impounds: Yes (?)

Other Charges:
Government Recording Charges: $150
Initial Deposits for Escrow Account: $3,299


We are planning on selling in 10-12 years.
We plan on accelerating the loan by continuing to pay the $1236 that we are currently paying. This will result in an extra $300 per month going directly to principal each month. When the loan recasts after 5 years my new payment will be lower (based on the reduced principal) and even more will go to principal. This will obviously be counterbalanced by the likely higher interest rate but we still come out ahead. So the annual recast feature of this loan seems like a HUGE benefit to me.

PROS:
Lower payment, ability to accelerate loan for 5yrs +
Annual recast after that lowers payments, increases acceleration benefit
Can fall back on minimum payment if forced to
Extra equity when we sell

CONS:
Interest rate has nowhere to go but up
"Worst case Scenario" cancels benefits (interest rate forces payment back up close to where we are now, especially if we are not disciplined about the extra payment)


Questions:
Other than some of the fees that I do not yet understand (above):
Are the costs of this loan in line with what they should be?

The Rate: My broker is a "buddy" I have known for 10 years and I mostly trust him but....
The costs are higher than our last refinance.
He said we qualified for a 3/1 rate on a 5/1 Loan because of our high credit ratings but my understanding (from a presentation I recently saw from an MIC broker) is that 3/1 ARM would be Treasury + 2% and a 5/1 is Treasury + 3% Isn't he giving me Treasury (.25%) + 3.25% = 3.5% (see above: Margin is 2.25% + Current Index is .25 = 2.5%
WHERE IS THE OTHER 1% COMING FROM???

Thanks!

[Night Surfer]

This may be somewhat redundant from the above but here is the breakdown from my "Itemization of Amount Financed" in the hopes that it presents a more complete and concise picture of this loan.

Amount Financed: $143,398.15
Prepaid Finance Charge: $3,796.85
Total Loan Amount: $147,735

ITEMIZATION OF PREPAID FINANCE CHARGE
Loan Origination Fee (1% + $): 1,477.35
Loan Discount (.5% + $): 738.67
Underwriting Fee: $500
Interest (5 days @ 14.1664 per day): $70.83
VA Funding Fee: $735
Closing or Escrow Fee: $275

AMOUNT PAID ON YOUR ACCOUNT / PAID TO OTHERS ON YOUR BEHALF
Appraisal Fee: $400
Hazard Insurance Premium: $540
Hazard Insurance Premium (3 months @ $45 per month): $135
Taxes and Assessment reserves (14 Months @ 226 per month): $3164
Title Insurance: $754
Endorsements: $250
Tax Holdback Fee: $75
Recording Fees: $150
Total From GFE 2010: $100

TOTAL ESTIMATED SETTLEMENT CHARGE: $9,364.85


Hope that helps clear up any confusion.

QUESTIONS:

Loan Origination: Are these "Points"? If so, why am I paying them?
Loan Discount: My broker said this was for "Non-Allowables" and that they "Had to go somewhere. What are these and do I have to pay them?

Are any of the other costs "Garbage Fees" that I should insist on them being removed?

Thanks again and sorry for the War and Peace novel

[VictorBurek]

Do you have any other debt? Do you have an emergency fund of 6 month living expenses?

Before you pay any extra toward the mortgage, make sure you have no other debt and the emergency fund.

If you dont have any other debt and have the emergency fund, why not go with a 15 year fixed rate. The rate would be about .25% higher, but it would never change. And if you plan to pay an extra $300 per month, that should be very close to what a 15 year fixed payment would be.

[Night Surfer]

Originally Posted by VictorBurek

Do you have any other debt? Do you have an emergency fund of 6 month living expenses?

Before you pay any extra toward the mortgage, make sure you have no other debt and the emergency fund.

If you dont have any other debt and have the emergency fund, why not go with a 15 year fixed rate. The rate would be about .25% higher, but it would never change. And if you plan to pay an extra $300 per month, that should be very close to what a 15 year fixed payment would be.

We have a zero interest car loan that will be paid off in 1 year.
That's it but our monthly bills are high with cell phones, high speed internet and feeding teenagers.

I have a 3 month emergency fund.

I thought about the 15 year loan. It's very tempting with the low rate and higher principal payoff.

My job has gradually but increasingly become less stable over the last 3 years (we are tied to the home building industry) so the option of being able to fall back on a minimum payment with the 5/1 ARM is an attractive "insurance" at this point.

Does the loan look OK to you? Why is the Rate 3.5% if the index is .25% and the margin is 2.25%? Wouldn't that be 2.5%?
From what I have read getting an ARM is not wise when the interest rates are at historic lows but it actually pencils out because of the re-amortization feature.

Thanks.

[VictorBurek]

the index and margin is what the rate would go to if it was adjusting now. All else looks okay. I disagree about ARM's not being wise. It seems you are going into it fully informed. ARMS are not bad, but the improper use of an ARM is.

With fixed rate mortgages at such a low rate, it is hard to pass that up for an adjustable rate. However, the average time someone keeps a home is only 4 to 7 years, so ARMS are a good option for most homeowners even though most wouldnt consider because they heard some bad story. An ARM has never caused anyone to lose a house much like a gun has never hurt anyone.

[Lbczyk]

Did u end up doing it and are you happy with it if so?

[tori609893]

Hey so I'm not sure if you have recieved answers to your questions but I thought I would give you some insight from my experience. I have done VA hybrid refinances on my house.

First off you asked about the APR (yearly) versus the interest rate (compounding rate). First the interest rate is your EAR or effective annual rate which is the yearly rate usually compounded monthly which almost all mortgages do. The difference between the two is the EAR is the amount of actual interest that is paid every year while the APR is the amount of simple interest paid in one year without calculating the monthly compounded interest. This can be very confusing so in regards to your current loan here are some numbers: For a 6% EAR the APR is 6.1678% because it is compounded monthly rather than yearly. It is important to understand that because the APR does not reflect the true amount you will pay over one year you cannot use it as the discount rate. You must convert it to the interest rate per compounding period which is usually monthly. It is best to look at interest rates as the monthly amount you are paying rather than the yearly. It is a more accurate picture of what you will be using because the EAR will change each year as the loan balance decreases. For a reference you can check out this book on Google books and go to page 131: Corporate Finance: The Core by Jonathon Berk.

In any case your interest rate is to high when compared to current rates and I recommend refinancing but not into a5\1ARM loan unless you don't plan on staying in the house part the next 5 years. You Nat be saving up front but the amount you will pay in the long run is not worth it. You will either have to refinance again in 5 years back to a fixed rate or into another ARM in order to protect yield from an increase of 1% each year which will also incur all the fees associated with a refinance again. It's best to use a loan calculator to compare long term savings over each type. Also consider recent history of average National rates to predict where they may be in 5 years. In my personal pinion it is best to protect yourself now with a fixed rate at 3.25% then have to pay the guessing game and risk what it will be in 5 years especially if chances are the 3.25% is the lowest is ever been and not likely to decrease any further in the future. That way you onlyv pay the fees once and are oriented for the next 30 years.