San Diego Housing Bubble News and Analysis

if you're planning to stick around in your , I'd refi into a 30year fixed while you still qualify imho. Who knows what happens financially to you in the future. You might not be able to qualify moving forward.

Don't feel too bad about buying in 2004. We did also. But frankly I don't care if things on my primary depreciate, because I wasn't planning to make money off of my primary to begin with.

Question... On that 4.3% fixed rate you have had since 04, was there any neg am going on? Also yes if I were you I would simply bite the bullet and grab the quickest 30 year fixed rate that you can. If you are planning on keeping the home for more then 4 years then buy down the rate as much as you can as well. The other possibility is to run the numbers. See how much you would save paying the lower rate for two more years, then assume at loan reset that you will max out the new rate. You did not say what your ARM indexes to (Libor, Prime etc...) Make sure the cap is the cap that you pay, not the cap on the index rate because the loan will index to the rate plus some margin.

Anyways you should be able to run the numbers to see where the crossover point is. At some point down the road it will have made sense to refi but it may be several years depending on your balance.

The big risk is the depreciation as it will be unlikely your home will appraise more in the future then it does today.

SD Realtor

Hi SD Realtor,

No neg am going on with 4.3%, loan based on Prime rate. We might keep the house for more than 4 years, depending on market situation. The cap is payment cap, not index cap. We ran the numbers 1 year ago and decided against refi, but did not take into account the depreciating home value or staying in the house for more than 8 years.

SDowner

It's amazing to find someone in a similar situation. I bought a rental single family detached home in early 2004 and also have a fixed 5 year at 3.75% and going to adjust in 2 years. For now I'm just staying with the 3.75% and gamble that I can still refi later. I should be able to refi because I've paid off the Heloc and only owe 75% of the original purchase price. We were also a single income family, but now my wife finished school and is also working. We are putting all of her income into CD's (5%APR) until the loan resets, at which point we will make a ballon payment of another 25% off the original purchase. Your situation is different. You may want to refi your loan now while you can. If you are able to pay down your loan a lot, you should be able to refi in 2 years. If you have good credit and are able to owe less then the current/future value of your home, you will be fine.

recordsclerk,

Just out of curiousity, where exactly did you get this 3.75% in 2004? And what were your total closing costs?

Also, SDowner.

Can you tell me exactly what your note states as far as rates go? Are you stsing you are currently paying prime - 4%.

I can't remember all the details of the loan, but I do know that I bought down the loan by a .25%, which saved me $2K in the five year period. I think the closing cost was $7K. My uncle is a broker and waived his fee to help with the rate. The Loan Company I send my payment to is Aurora. I also know that the rate dropped .25% two days before closing and went up again the next day. I got real lucky with the timing on my loan, because if I'm correct March 2004 was the best time to get a loan. The Escrow closed on April 1st. I also got lucky the year before when I refied another loan on my primary residence in June 2003 (I think) and got a 15yr fixed rate of 4.75%.

recordsclerk,

Do you mind if I ask you the amount of your loan on the 5/1?

The loan is for $336K, the home was puchased for $420K. Some of the other information like closing cost may be incorrect. It's hard to remember all the details. I am sure about the 3.75% and the buy down of a .25%. I also know that buying down the rate saved me a couple thousand dollars during the 5 year period if I pay interest only. The down payment came from a heloc from primary residence, but has since been paid off.

SDowner good for you with no neg am and that you are paying off the HELOC... So the biggest variables appear to be the future interest rates and your length of owning the home.

The hard part here is that these two variables will shape the decision. My advice is to run run run numbers. Set up several different scenarios of staying x number of years and then establish different interest rates and see where you land. Some thoughts....

You may want to simply not refi and bang down the heloc with the money you save. If in the future you decide to refi you have some equity to cope with the depreciation of the home in case you decide to stay in it and refi at loan reset time.

Also the pessimist in me sees no way that the fed funds rate can not go up in the future. That pessimist has a friend named Joe recession who thinks a recession will bring rates down again... sorry I am not much help on that issue... Perry and Asianautica have insightful posts on that...

So... I feel bad for giving you a non concrete answer at this point. It is really a number crunching exercise using different variables on the rates.

SD Realtor

I have a similar situation. I have 3/1 ARM with current interest rate 3.875%, but will get adjuested this Novemeber (max 2% more, so up to 5.875% from Nov 2007 ~ Nov 2008). I am thinking to buy a townhouse in North CA, and rent out the one in San Diego (just thinking and planning). Should I refi to 30 yr fix for my SD house now? The pro is I don't need to worry about it any more even I may rent it out later. The con is I loss several month of low interest.

Any advise?

Incarmelvalley, it's harder to give advice since you are undecided what you are going to do. If you are planning a move out of socal, make sure you won't want to or need to sell before you refi. Being a landlord more than a drive away has a lot of drawbacks and you need to make sure your income and new housing costs won't require you to sell before you get into the mathematical benefits of a refi. Sdowner's situation doesn't have any variables other than a purely mathematical one. My best advice is to not ask the advice of a mortgage broker unless you already know and trust them (then it's a maybe).

I'm with sd on this one, I have as many reasons to believe rates will go up as I do they will stay low. Trying to guess future rates can and will make your head explode. If you can afford the 30 fixed, and you will be there a while it may be worth the cost for the ten extra minutes of sleep each night and the 10pts off your blood pressure knowing you can and will ride out whatever craziness happens in the next 24 months.

Hi SDRealtor and others:

update on refi situation:

1. Rate cap of 2% every year (as Incarmelvalley mentioned) is misleading. Most options ARMs have 5% cap at FIRST DATE OF CHANGE. meaning, your rate will go up to max of 9.3% at end of fixed term based on current Prime rate index.

2. My current house has appraised to original purchase price.

3. Worked out all the numbers, really put in lots of scenarios. It makes sense for our situation to fix the monthly payments as soon as possible.

4. We have paid down the HELOC and have the capacity to pay it off fully immediately before refi. So, essentially will only refi the first loan. No cash out business.

5. Shopped around for rates, 30-year fixed. Got
-6.125%, no closing costs, no prepayment penalties thro a mortgage broker, contingent on 20% equity after appraisal, know nothing about lender, mortgage might change hands after closing. (have locked this rate)
-6.25%, no closing costs, no prepayment penalties thro our current Mort Lender. (bargained with them after locking lower rate)

Questions:

1. What else should I look out for when refinancing?

2. Can I get better rates then above for 30-year fixed?

3. Is it imperative that the lender be very well-known? Is it enough that I know the terms of the loan very well and not care about who holds my mortgage?

SDowner

Get a Good Faith estimate (GFE) and look out for junk fees. I've seen loans with junk fees totaling a few thousand dollars on a low rate that could have been used to buydown the rate quoted from another lender w/ a higher rate but lower fees.

No cost, should have no fees (including title/escrow, etc.) Basically you need a copy of the Truth In Lending. Make sure your APR matches your interest rate. Easy as that.

6.125% no cost is a decent deal as of today.

4 year holding period is not long.

If i were you, I'd sell now. You can probably get out and make some money. If you take history as a guide, the last housing slump was from 1989 to 1996. I think that we are now at the equivalent of 1991. So, 4 years from now, you might end up selling your house at the worse possible time, substantially below 2004 purchase price. This slump may last longer than the last downturn.

Think about the carrying costs you're paying now. You will not recoup them in appreciation. You might be better off, selling, renting, then moving on whatever destination you're planning to move to.

Good job on the research SDO... As sdr said get a good faith estimate. As far as rates go the rate you have quoted looks okay. If you want to see the trend then just pull up the 10 year treasury yield to see if it is trending up or down. This will give you an idea of which way rates are trending so perhaps you can get a better rate if they seem to be trending down. Otherwise if they are trending up then lock it in... Once upon a time I was refinancing a property and I had a smoking rate. However the mortgage broker had my loan submitted to a lender that went out of business the week before I was to sign loan docs. They basically got caught in a rate hike. I think it was about 4 years ago that rates really bottomed out in like June but then moved up VERY quickly and by August this lender was done. My loan never got funded and I was screwed. So yeah it pays to make sure your lender is reputable. However that being said I know it is hard for regular guys like us to assess the quality of the lender.

As Perry said you may be better served to sell rather then refi but it all depends on your long term plans.

SD Realtor

Thank you all for your advice.

Regarding the refi:

Did ask for GFE and going to look into it. We are going thro a broker who was recommended to us by some people who have refinanced with that person. The broker says she will pay the closing costs and therefore there would be no closing costs and that APR and rate would be different because of that. The escrow company will know that the broker is responsible for the closing costs, but not the lender. is this acceptable? We have never done a refi and never dealt with brokers in the past. It sounds too good(fishy) to be true? Both the lender and escrow company is through the mort broker....isnt there a conflict of interest here? can i go with another escrow company to protect my interests in refi?

regarding holding on to the house or sell. i agree i would be better off selling the house. thought about it last year when we could have sold off easily, but as i say things differ in different situations. in our situation, my spouse is earning good income (engineering). i am working towards a professional degree in a totally opposite field (medicine). we cannot spend time, money, energy right now to sell a house, shift households, etc. yes, we made a mistake in 2004, but hindsight is always 20/20. we could have done better research getting into the housing market. we did not. we are young and still have time to learn from our mistakes and not repeat them.

right now, i do not want to make any more mistakes as far as a refi goes. kindly advise.

SDowner

If that's the case APR will be higher than the rate. Have her give you an estimated HUD-1 from escrow. The new loan amount should match your payoff + prepaids (interest, impounds, etc.).

One positive for your situation is that you bought early in 2004. Based on your escrow date I'm assuming you paid Feb pricing. That was the biggest year for increases, so you would have paid significantly more in Nov/Dec. That explains why your home has appraised for the original purchase amount -- you've been insulated from the price declines so far because you were just losing the (theoretical) gains made since you bought.

Hi All,

Thanks for all your advise. Closed the escrow on refi for 30-year 6.125%, no prepayment penalty. We were lucky in that our house appraised with 20% equity right now. As many in this board would say that situation will drastically change in upcoming 5 years. I will not only lose my equity but also high carrying costs due to HOA, high P&I, property tax, etc.

We did calculations based on what it would cost to rent similar housing like ours right now in the same area and compared it to owning our house for the next 5 years. As Perrychase said, we could not get a positive spin on it, even with tax deductions. (this is what will bring down the market as you all predict)

I am not trying to explain or protect my decision here (might sound like it), just saying that we took all the risks into calculation with a worst case scenario (50% loss in the next 5 years) versus renting at the same time. As SDR, Rustico have pointed out repeatedly, our decision to stay put in spite of loss was made upon job situation of both spouses, what we might lose by selling right now compared to selling after 5 years etc.

No one knows what will happen in the next 5 to 10 years. Everything might change financially for us. It might get better or it might get worse. I am hoping for the best, but preparing for the worst.

Once again, this website is awesome. I have learnt a lot from many people here. Thank you all.

SDowner

SDowner,

Congrats on your refi. I may have to do the same. Do you mind to share where you get 30-year 6.125% loan. And do you pay points / fees? Thanks.

Hi InCarmelValley,

We got 30_year 6.125% with no points or junk fees. In the whole transaction, we paid about $74 extra in interest because of memorial day weekend and title taking time to close after funds were released. I am fuming a little over that dollar amount, not in money terms, but just in principle.

We got 30-year 6.125% because we have VERY good FICO score, save a lot (have 2 years of mortgage in an emergency fund), live below our means, save 17% of salary in 401(k), can invest rest of money in stocks after refi situation. Our behaviour helped us pay down HELOC in 3 years (original personal plan was to pay down in 5 years), and added 12000 worth of improvements to our modest abode for personal happiness.

We shopped around "A LOT", got ourself educated, calling different banks, mortgage brokers, contacts thro friends, colleague at work etc. Then, we chose someone based on lots of factors, reliability, rate, our conditions being listened to. (Piggington helped a lot)

What I am trying to say is, InCarmelValley if you know ur strength financially, if you are a good customer for the lender and you know your house will appraise with 20% equity, then no matter who you speak to, you should get the best possible rates with best possible conditions. Do not accept anything less.

Sorry for not giving more info. This is my first experience blogging in any website and I am very wary of giving out any kind of personal information.

SDowner

SDowner,

Thanks for the info. I am not interested in any of your personal info. I just like to know which brokeage firm you got the loan.

Regards,