Refinance/ Lender Question (home loan, fixed rate, 2011, real estate)

[SC_resident]

Please advise on best options that would work for my scenario.

We are a young family with small kids. We purchased a Condo at $335,000 4.5 years back, putting a 20% downpayment. The 5 year Balloon mortgage with a Rate of 4.75% is Set to reset in this year end. The remaining loan balance is $250,000

The Condo Value is currently showing up as $390,000 in zillow.com .

Ultimately we want to move out to a bigger Single family home probably within the next 3 years. All depends on whether we can sell this condo or not ? Or if we can afford, we will try to rent this out and buy another property.
So at this point, we are not sure if we will retain this property or not. The odds are more that we will sell it, if we can.

Looking for refinancing options.

1. Is it wiser to pay for points and get a lesser Rate while refinancing ?

2. Is it bad to try and pay-down the Loan amount a little bit at this point so we can get better monthly payments.

3. We have One Big-time lender saying he will only fund 60% of appraised value as it a condo, but we get 5/1 ARM rate of 5.25%.
Is it bad to get into another ARM ... now ? Will the market turn around in 5 years ? And also we will not know until the appraisal is done to find out how much the Loan is going to be for?

4. Compared to the bigger lenders, we are getting better Rates for a 30 year fixed from a small lender who we accidentally found out.
But how do I know if a lender is genuine.. ? (His website is down.)
He gave us his license number and we could check his records in the
www2.dre.ca.gov website where his official contact address and other detailas are listed.
What else is needed to verify a lender ?

5. The lender is suggesting that we roll closing costs of 3.5K into the Loan.
Is that advisable? He also mentioned not to pay-down or basically not to put any money into the Property right now because Real estate is a depreciating asset right now. Rather take up the slightly higher monthly payment.


Thanks for patiently reading through.

[Daddys///M3]

If your goals are ultimately short term then I would agree with the LO you mentioned in that buying down the rate or paying down the mortgage over the short term would have very little impact except to your liquid positions. Of course I cannot say definitively one way or the other as I am not familiar with your entire scenario and financial picture. I personally believe that if you are going to dump money into any property, especially with current market conditions what they are, then there should either be irrefutable immediate need or long term benefit.

Also, take Zillow with a grain of salt. Zillow does not use the same methods than an actual appraiser will use, and as such can be pretty inaccurate at times.

[renriq02]

You should look at both options. Paying 1 origination fee...and not paying one. Look at when you will recoup the cost of paying the origination fee.
The average time is 3-4yrs to recoup points.

If you plan on paying down the loan, it would be a wise choice to get a interest only loan. This way you will be paying interest only on the 'current' principal. If you pay down on a regular 30yr fixed or ARM, it will not have detrimental effect on the principal.
30yr fixed mortgages are front loaded with the interest for the first 10yrs.

Most borrowers roll in the closing costs into the loan amount.

Originally Posted by SC_resident

Please advise on best options that would work for my scenario.

We are a young family with small kids. We purchased a Condo at $335,000 4.5 years back, putting a 20% downpayment. The 5 year Balloon mortgage with a Rate of 4.75% is Set to reset in this year end. The remaining loan balance is $250,000

The Condo Value is currently showing up as $390,000 in zillow.com .

Ultimately we want to move out to a bigger Single family home probably within the next 3 years. All depends on whether we can sell this condo or not ? Or if we can afford, we will try to rent this out and buy another property.
So at this point, we are not sure if we will retain this property or not. The odds are more that we will sell it, if we can.

Looking for refinancing options.

1. Is it wiser to pay for points and get a lesser Rate while refinancing ?

2. Is it bad to try and pay-down the Loan amount a little bit at this point so we can get better monthly payments.

3. We have One Big-time lender saying he will only fund 60% of appraised value as it a condo, but we get 5/1 ARM rate of 5.25%.
Is it bad to get into another ARM ... now ? Will the market turn around in 5 years ? And also we will not know until the appraisal is done to find out how much the Loan is going to be for?

4. Compared to the bigger lenders, we are getting better Rates for a 30 year fixed from a small lender who we accidentally found out.
But how do I know if a lender is genuine.. ? (His website is down.)
He gave us his license number and we could check his records in the
www2.dre.ca.gov website where his official contact address and other detailas are listed.
What else is needed to verify a lender ?

5. The lender is suggesting that we roll closing costs of 3.5K into the Loan.
Is that advisable? He also mentioned not to pay-down or basically not to put any money into the Property right now because Real estate is a depreciating asset right now. Rather take up the slightly higher monthly payment.


Thanks for patiently reading through.

[TimtheGuy]

One option I did not see listed...why not just let the balloon reset to a more current market rate for free? Especially if you plan on selling in the next 3 years.

[SC_resident]

It is my understanding that 5 year Balloon means Pay-up the whole loan at the end of 5 years.

Looking at the market scenario today, I am guessing there is no guarantee when the market will turn around.

And even if we had an ARM option of Rate resetting every consecutive year, I guess I will just sleep better knowing that I have a CONSTANT Rate!

Thanks for all your inputs. We will go with the 30 year Fixed option at this point.

[TimtheGuy]

Originally Posted by SC_resident

It is my understanding that 5 year Balloon means Pay-up the whole loan at the end of 5 years.

Looking at the market scenario today, I am guessing there is no guarantee when the market will turn around.

And even if we had an ARM option of Rate resetting every consecutive year, I guess I will just sleep better knowing that I have a CONSTANT Rate!

Thanks for all your inputs. We will go with the 30 year Fixed option at this point.

There is a very good chance that your balloon has a reset option. You should be able to find out by going through your closing docs. Look for a balloon rider or disclosure.

If you feel you have to have a fixed rate, you definitely don't want to pay any points because of your short projected time frame to stay in the home. You want to go with a higher rate lower costs structure.

[chuck-a-muck]

SC has plenty of options. I like the 3/1 ARM right now for the best rate/term refinance available. Since you are planning on selling, you should find the shortest fixed rate possible, especially if there is a Pre-Pay penalty. Otherwise, go with the 30-yr Fixed and no Pre-Pay, but be prepared to live with a higher rate. Your loan officer is correct that you can buy-down the rate into the 5's, but in a 30-yr Fixed, it'll cost a bunch.

As mentioned, most all refinances assume paying all costs inside the loan amount. Only pay points if you are advised that it will help your debt-to-income ratio. Remember, your condo has appreciated $50k in less than 5-yrs -- whether that's a lot or a little to you, it is 'found' money. Use part of it now or all of it as a down-payment on the next property.

For the past few months, rates have been increasing, so do this ASAP. However, if your original index is the 6-month LIBOR, you might consider waiting on the reset -- this index is forecast to continue to drop through year-end 2008 minimally. If you had a low margin of 2.25%, you might be sitting pretty.

Finally, realize that you are refinancing at the bottom of the market -- this is a good thing. You can assume that your property will increase much further in value over the next three years, compared with the last two years. If properties in your area had held value, the condo would likely be appraising at $435k max today, which is where it'll probably be in 2011.

[SC_resident]

You were right !

We do have an addendum (Form 3291) in our balloon rider document that states we could reset our balllon mortgage to a fixed rate for the next 25 years if we meet certain crtieria (which we do) .

It says something like ..

The Modified Note Rate will be a fixed rate of interest equal to the Federal Home Loan Mortgage Corporation’s required net yield for 30-year fixed rate mortgages subject to a 60-day mandatory delivery commitment, plus one-half of one percent (0.5%), rounded to the nearest one-eighth of one percent (0.125%) (the “Modified Note Rate”).

Also...

I understand the Note Holder will charge me a $250 processing fee and the costs associated with the exercise of the Conditional Modification and Extension Option, including but not limited to the cost of updating the title insurance

We called our current Lender to discuss this and they are not being friendly on this. They are asking us to "WRite" to them for any enquiries regarding this matter. Well ..they have loan agents ready to work with us for a REfinance But not to discuss Resetting ?

Mmm.. that sounds a bit weird. We wil be writing ot them. But meanwhile if any of you know how this works usually... can you please explain ?

1. So we have to add 0.5% and round it off to the next 0.125% (1/8th value) to the value in the table in the Fredie mac's website against 60-day and 5 year balloon (which is 6.64) ?
Required Net Yield (RNY)

2. Usually is the cost to Reset lesser than a refinance cost ?

3. Can this be done anytime before the 5 year ballon ends ? Or should we wait till the 5 year term ends ?