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Old 09-07-2010, 08:05 AM
 
531 posts, read 2,894,480 times
Reputation: 579

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Hello, my wife and I have owned our home for 4.5 years. Last year, we refinanced into a 7/1 ARM at a rate of 4.99%.

I am considering refinancing again and I have been presented with these options:

30 year fixed, 4.375, no points
5/1 ARM, 3.375, no points
7/1 ARM, 3.625, no points

These are all FHA loans, as our LTV is 97% (I believe that is too high, my estimate is 90% but I'm not going to argue).

The broker I am dealing with is suggesting rolling all of the closing costs/title insurance into the loan balance, and my upfront costs would only be the appraisal fee of $450 (they have already waved the application fee).

My current monthly payment for principal & interest is $1,719. The new monthly payment for the 3 scenarios above would be:

30 year fixed: $1,667
5/1 ARM: $1,497
7/1 ARM: $1,540

I'm probably ruling out the 5/1 ARM. So my choice would be between the 30 year and the 7/1 ARM. My wife and I are not intending to be in this home long term. 7 years is probably a good estimate for when we would leave, if not sooner.

One of my hesitations with this is that in ruling the various closing costs and FHA insurance into the loan, our balance increases by about $9,000. So we go from owing $298,000 to $307,000.

Thoughts on this?
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Old 09-07-2010, 08:35 AM
 
3,555 posts, read 7,831,136 times
Reputation: 2346
If you really are going to move in SEVEN YEARS MAX, which is often impossible to know. But if that's a firm deadline my advice is to DO NOTHING. Here's why;

1. ARM's are a disaster waiting to happen. Interest rates are at about a 70 year low so which direction do you think any movement is going to be? Assume you're in the lobby of a 70 story building, which direction do you think the next elevator is going?

2. Let's look at your monthly savings and the payback period to get back your $9450 outlay;
(1)$54/month-175 months or 14.5 years.
(2) you're not considering
(3) $179/month-53 months or 4 1/2 years.

While option 1 is your "best" as it gets you locked in, it far exceeds your time horizon so even though I would never do an ARM I would rule this out.

Option 3 is a 7/1 ARM, but you already have a 6/1 ARM based on what you wrote. IMO this would be a stupid option, you'd be paying that much money to get a ONE YEAR extension on your ARM. This is how they suck people in, by pretending that the $9,000 doesn't count because it's "rolled in".

I always think long and hard before taking on any debt, and to me $9,000 would be a significant debt.

The best advice I can give is DO NOTHING.

golfgod
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Old 09-07-2010, 01:35 PM
 
531 posts, read 2,894,480 times
Reputation: 579
Quote:
Originally Posted by golfgod View Post
Option 3 is a 7/1 ARM, but you already have a 6/1 ARM based on what you wrote. IMO this would be a stupid option, you'd be paying that much money to get a ONE YEAR extension on your ARM.
Really the one year extension on the ARM is meaningless to us. We'd be doing this to reduce our monthly expenses.

So basically, to save $180 per month, or $2,200 per year, we'd be adding about $9,000 to our loan balance. That's what it comes down to.

I am only making an assumption, which is all you can do about the future, but I feel pretty certain that in 7 years we will be ready to move, if not sooner. Our income will be higher as my wife is currently a stay at home mom and she'll be able to go back to work in 4 years or so when both kids are in school. And I would expect that I'll be making more in 7 years as well.

Also, we don't look at this property as a long term home. It's a townhome and it works ok for us for now but it's not something we want to be in for too much longer.

The rate adjustment is going to hit us either way, whether we do this refi or not, as our current 7 year ARM expires in 6 years. So there's no real concern with that.

To me, the only question is how significant of a hit will be the extra $9,000 on our loan balance. Regardless of what we sell the house for, we'll make $9k less is how I'm looking at it...And since we'd be planning on selling in the not too distant future, I would think that will take a pretty big chunk out of our profit...
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Old 09-09-2010, 07:02 AM
 
2,036 posts, read 4,234,278 times
Reputation: 3201
Quote:
Originally Posted by usedtobeanyer View Post
And since we'd be planning on selling in the not too distant future, I would think that will take a pretty big chunk out of our profit...
If your LTV is currently 97% and you financed the home on an arm, your equity position in a few years is going to be marginal anyway, especially once you pay to list and sell the property.

I second Golfgod's sage advice to do nothing. Refinancing won't solve anything. Given the difference in monthly expenses between all options, you might be better off making a few lifestyle adjustments to save cash.
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Old 09-10-2010, 11:07 AM
 
20,793 posts, read 61,147,762 times
Reputation: 10693
It's not worth refinancing for what you 'save' in monthly payments to the 30 year and I would NEVER do an ARM in this economy. Interest rates are VERY, VERY low now but in a year they may not be. There is just too much uncertainty in the economy to risk something like this. I wouldn't refinance at all.
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Old 09-13-2010, 02:11 PM
 
Location: West Orange, NJ
12,546 posts, read 21,353,711 times
Reputation: 3730
i don't feel as strongly anti-ARM as golfgal, but her point is still correct. do nothing.

you're fairly confident you're moving in 7 years or less, but you may push that 7 year threshold, so you're possibly placing yourself in a position where, after 7 years, your interest rate will almost certainly be significantly higher after the adjustment. then you're going to be forced to sell (unless you can afford this new payment) or forced to refinance again (adding the costs of refinancing again).

i'd say do the 7/1 ARM if you felt like you'd be moving in 5 or less. then it's more certain you won't push the envelope on the date.

the 30 yr doesn't seem worth the costs for those savings.
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Old 09-16-2010, 12:39 PM
 
4 posts, read 5,654 times
Reputation: 10
Default Question

Are you in an FHA loan now?
If you are, you can do an FHA streamline, possibly with no appraisal.(There should not be an application fee, it is considered a "junk fee".) With closing costs of 9k, it would take you almost 82 months to break even, with a monthly savings of 110.00 a month. I agree with a few others; it does not make any sense for you to refinance right now; you would just be putting money in someone else's pocket-

Quote:
Originally Posted by usedtobeanyer View Post
Hello, my wife and I have owned our home for 4.5 years. Last year, we refinanced into a 7/1 ARM at a rate of 4.99%.

I am considering refinancing again and I have been presented with these options:

30 year fixed, 4.375, no points
5/1 ARM, 3.375, no points
7/1 ARM, 3.625, no points

These are all FHA loans, as our LTV is 97% (I believe that is too high, my estimate is 90% but I'm not going to argue).

The broker I am dealing with is suggesting rolling all of the closing costs/title insurance into the loan balance, and my upfront costs would only be the appraisal fee of $450 (they have already waved the application fee).

My current monthly payment for principal & interest is $1,719. The new monthly payment for the 3 scenarios above would be:

30 year fixed: $1,667
5/1 ARM: $1,497
7/1 ARM: $1,540

I'm probably ruling out the 5/1 ARM. So my choice would be between the 30 year and the 7/1 ARM. My wife and I are not intending to be in this home long term. 7 years is probably a good estimate for when we would leave, if not sooner.

One of my hesitations with this is that in ruling the various closing costs and FHA insurance into the loan, our balance increases by about $9,000. So we go from owing $298,000 to $307,000.

Thoughts on this?
Reply With Quote Quick reply to this message
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