[quote=Doooh][quote=bearishgurl][quote=Doooh]Index is 1 yr Libor and margin is 2.25%[/quote]
Sorry, I forgot to ask if the REO lender is asking you to pay any up-front points or origination fee to obtain either of these two mortgages and if so, what is the percentage of the fee(s) or point(s)?[/quote]
The bank is crediting 3% back to the closing costs on the deal. I have to burn $16k or I loose it.
So yes, the loan is being bought down, but that realy doesn’t matter to the equation because it’s not my $. It was pretty easy to narrow down the loan type to choose from when accounting for the kick back. I’d leave $ on the table if I didn’t use one of these loans. The 7.5 yr ARM option didn’t make much sense but it was a contender. I also came up with more than 20% down to take full advantage of the loan limits. $417k was a juicy limit in order to get a better rate, but was more than the standard 20%.[/quote]
I will assume the $16K applies to ALL your closing costs and not just the costs of originating your mortgage? I was trying to come up with an APR, but since you said you’re not paying any up-front costs =<$16K, then perhaps the APR doesn't matter, unless the buy-down pts and mtg orig fee cause your closing costs to go way above $16K (something to check on). In other words, it isn’t a deal if they or “their lender” will charge you 2 points + a 1 pt origination fee. Also, do you know WHO the lender will be on each choice of loan? Will it be the current owner of the property you’re buying? Or will their loan officer just farm your mortgage out to MERS?? Also something to look into.
You are smart to stick with a conforming loan of =<$417K, regardless of amt of downpayment >=20%. Loans over this amount have a .375% to .75% (or poss higher) higher interest premium, depending on the lender.
[quote=Doooh]Here’s the Mortgage options that I’m debating.
I’ve narrowed it down to 2 different loans. The REO bank is giving me $16k for closing/loan cost so it was relatively easy to narrow the loan down to these two below. I have to use the $16k or loose it, the other loan options leave $ on the table.
$2800to$3000 in rent + $2500to3000 payment = $5500to6k Monthly payment[/quote]
$2800-$3000 mo in rent for your two “granny flats” (new or not) is too high of a monthly rent projection for tenants who reside in BFE. There are few jobs out there and it is not easy to get to jobs. Your tenants will be retired and may be on a fixed income.
[quote=Doooh]So I’ll be paying it off in $6k monthly chunks if there isn’t anything unforeseeable happening. The minimum payment is $1600 on the ARM or $2100 for the fixed, but those figures don’t matter because I’ll be paying 3 to 4x the minimum payment. The payment on the ARM caps out at $2800 if all hell breaks loose in 5 yrs and all the caps are maxed out.
SO
2.5% apr on a 5yr ARM caped at 7.5% max for 30 yrs[/quote]
This 5/1 ARM looks like it has negative amortization built into it because the APR is only 2.5%. There is no free lunch. My take on this program is that the first five years are I/O and only partial interest at that. This “2.5% APR” representation is based upon making only the minimum payments.
If this is your 1 yr LIBOR w/2.25 margin, then:
(current index = .778) + 2.25 margin = 3.028%
Your first year’s mo pymts will be $1764.19. Your homeowner’s policy premium will be approx $2500 annually or $208.33 mo if the property is situated in a fire-hazard zone (likely). This is for a $1,000 ded policy. Your taxes will be approx. $6,050 annually or $504.17 mo.
$1764.19 + $ 208.33 + $ 504.17 = $2476.69 PITI under the 1st yr LIBOR payments.
The 12 mo LIBOR index is currently at the lowest level it has been in the 22-yr history I could find and has been somewhat volatile. Its highest point was 9% in Sept. 1989. From there is slid to 3.375% in Oct 1992, peaking at 7.25% in Jan 1995. From there, it troughed along in the 5-6% range before peaking again in May 2000 at 7.45%, sliding to 1.2% in June 2003. It then peaked again in June 2006 at 5.59%, sliding to abt 2.675 in April 2008, rising to 3.85% Oct 2008, going into a free fall of about .55 in March and Nov 2010.
I think the LIBOR certainly has more upside and than downside and am not an economist. Remember, your margin is added to this index to calculate your annual payment. To equal your current fixed rate offering of 4.5%, the LIBOR index would have to rise to 2.25 or higher and stay there on the month your payment is being adjusted. If your annual cap IS 2%, this couldn’t happen until the 25th month (if conditions permit at that time). The LIBOR index was last at 2.25% about Jan 2009.
$2114.39 + $ 208.33 + $ 504.17 = $2826.89 PITI under the 4.5% 30-yr fix program.
[quote=Doooh]I’m even debating on paying the minimum on the 5yr ARM, saving the $4600 a month I’d otherwise be paying monthly. I’d be hoping for a interest rate increase and invest the $4600 in CD’s or a Savings account (Read super save insured) until year 5, and paying a couple hundred thousand $ lump payment before the interest adjusts on year 5. Here’s crossing my fingers for the EmigrantDirect savings to jump above 2.5% in a year again… How I loved my 5% intrest rates on my savings years ago.[/quote]
Doooh, every month you choose to make the “minimum payment” on your Option ARM, you defer interest and it is added to the principal. Even if you throw $200K in year 5 to the loan, you are STILL paying off this added balance of deferred interest along with principal. I would recommend sending extra payments for the principal if you wish to reduce it faster and specify how much you are paying towards extra principal only on your monthly mortgage coupons in the space provided. On an Option ARM, pay ONLY the fully-amortized rate every month to avoid deferred interest added to principal (negative amortization). Once your neg-am amount renders your mortgage 125% of (originated) value, your lender will exercise their “option 3” on the 61st month, your payment will jump severely higher and this act will limit your future options and cost you much more to retire the loan when and if and however you choose to.
[quote=Doooh]$417 is the mortgage amount.[/quote]
I would go with the LIBOR if you know you can retire the loan at any time. I would be careful to make only the fully amortized payments every month and specify exactly how much goes to extra principal (if you wish) in the spaces your lender has provided. Don’t just send in a lump sum without sending in a coupon specifying where it goes and then check your next statement’s principal balance to make sure your extra payment was applied.
If you will soon place your liquid assets where they are no longer liquid, I might consider taking the 30-yr fixed rate now (while someone else is paying for the loan). The difference is $350.20 per month less payment on the LIBOR ARM for the first year. This money could be used to lower the principal every month. When your mortgage is recast at the 61st month, it will be recast at the new balance for 25 years (which will take into account all the extra payments you made).
No one knows what will happen to indexes or the mortgage market in the coming years. No one knows how easy it will be to qualify for a mortgage, either. So since you probably plan to stay in your private mini-estate for a long time, if you take the ARM, just be prepared to retire it if the index + margin adjusts to 7%+ and/or the fully-amortized payment becomes very uncomfortable. You didn’t give me the annual cap but they are usually around 2%. That is, your interest rate cannot rise more than 2 percentage points annually. CHECK ON THIS!! And DO NOT AGREE TO ANY PREPAYMENT PENALTIES!! If your lender offerings have them and they will not remove them, leave this money on the table, seek your own mortgage and let the seller/REO lender pay all your other non-reoccurring closing costs.
Good luck. Go in with your eyes wide open and hopefully your agent is not lazy and dumb.
