[quote=ljinvestor]Bear- Similar programs are out there because AimLoan will offer a 5yr ARM at 2.5% with 2pts or 3.125 on the 7yr ARM paying 2pts.
Here are details for their 7yr based of LIBOR
-snip-
You have the right to make payments of principal at any time before they are due. A payment of principal before it is due is called prepayment. In any 12-month period during the first thirty-six months of the loan term beginning on the date of the note or the note date anniversary, you may prepay up to 20% of the original principal amount of your loan without incurring a prepayment fee. If you prepay more than 20% of the original principal amount in any such 12-month period during the first 36 months of the loan term, you will be required to pay a prepayment fee on any amount prepaid in excess of 20% of the original principal amount. The prepayment fee will not exceed 6 months’ advance interest on the amount prepaid in excess of 20% of the original principal amount[/quote]
ljinvestor, I hadn’t heard of any programs where the ARM borrower is not floating with the index in the first years (esp the first 60 months) of the loan, but I haven’t really shopped mortgages in recent years. Doooh is claiming his LIBOR ARM offering has no prepayment penalty. It appears that in the first 36 months of this program you posted here, prepayment of over $83,400 (20% of Doooh’s $417K loan) will result in a prepayment penalty of about $10K. In addition, if Doooh DOES make a prepayment of $83,400 (whether all at once or in increments) in the first 12 mos of the loan, then he can’t make another prepayment until month 13. From months 13-24, he can make another prepayment of =<$83,400 and the same for months 25-36. After that, the PP penalty disappears. That's the way I'm reading it.
If the ARM being offered Doooh is similar to this one, the "floor" or 5% below start-rate provision shouldn't affect him because he will be obtaining the loan when its index is at or very close to a 22-year bottom.
Doooh?? ... Is the ARM you were offered similar to the one that ljinvestor described here? If so, recheck your disclosures for a prepayment penalty. I just feel it has to be there due to the artificially low interest rate holding steady for five years (regardless of what the index does).
[quote=Doooh]My questions are, what is the most prudent thing to do with the $41,000 I just saved by year 5. Is the risk worth the $41k. The risk being an extra $800 in payments starting at year 6.[/quote]
Ask your loan officer for the formula he used to obtain your payoff for the LIBOR ARM at month 61. And what did he use for a LIBOR index forecasting tool?? If you can get this info, post it here. We have a few Pigg spreadsheet geeks on staff here ;=] I myself have built these ARM amortization formulas but NOT for the LIBOR program. So my month 61 payoff (below) is just using 3.0% constant for the first 60 months, since you state your payment will not change.
[quote=Doooh]1) Should I have paid it in $6k monthly payments thus saving 2.5% in interest over 5 yrs?[/quote]
$6,000 mo – $1758.09 (3% pymts) = 4241.91. This is a prepayment of $50,902.92 yr. You will not incur a prepayment penalty for this amount but I don’t see how that is going to save you ANY interest in the first five years. If you make extra payments for the first 3 years (up to $83,400), your mortgage will be recast at the 61st month at which time the percentage of your payment applied to principal every month could go way up, depending on how much you’ve shaved off the principal with extra payments in the first five years.
[quote-Doooh]2) Should I have stuffed that extra $4600 per month into a savings account and pay it in a lump sum at year 5 while making interest on it for the previous 5 years.[/quote]
If you are going to make prepayments on this loan, I would follow the rules if there is a prepayment penalty and pay whatever I was able to and could get away with to avoid the prepayment penalty. I have your prepayment at $4241.91 monthly if you make $6,000 mo pymts, NOT $4600 (see above). I can’t tell you without seeing the formula your loan officer used, but I would surmise that you would be better off in the long run (whether you keep or sell the property at the 5-yr mark makes no difference), to put extra $$ you have into prepayments, due to the recasting of your ARM at the 61st month. It’s quite likely your rate could go to 7.5%. It really has no where to go but up. If I had to pay 7.5% on that large of a loan, I wouldn’t mind so much if a good chunk of it was being applied to principal.
[quote=Doooh]3) If I make the minimum payments on both loans what year is the break even point? simple math puts it at 9.5yrs, but I’m dealing with interest so this is were it gets tricky for years 5,6,7,8,9 and 9.5.
4) I hope to have it paid off by before the break even point so I could easily leave $10’s of thousands on the table by not choosing the correct mortgage.[/quote]
You can’t know the “break-even point” without knowing what your ARM is going to do after the 61st month. If you want to use the maximum of 7.5% for 25 years, we can do that, but the fixed rate program will end up costing you less interest after about 7-7 1/2 yrs (84 mos +).
[quote=Doooh]5) I’m assuming all hell breaks loose and the worse case scenario happens: I start paying 7.5% interest on the remaining balance at year 5. (That’s actually not to bad historicly, so all hell breaking loose isn’t as bad as it seems)[/quote]
Well, Doooh, it seems as if you’re okay with 7.5%. If there truly is no prepayment penalty are you are always in a position to drastically pay it down or even retire the mortgage, then who cares?? Go with the flow and take the cheaper ARM.
[quote=Doooh]Principal paid | Balance Due | Interest Paid to date
Here, the LIBOR ARM pays off $9,532.82 MORE (with no extra payments made) by 60 months than the fixed rate mortgage. HOWEVER, that amount is almost equal to a possible prepayment penalty (if they exist).
I just feel like you severely limit your options by agreeing to a prepayment penalty. All kinds of stuff could happen in your life where you might want to sell or need to sell.
Doooh, I would check BOTH mortgage offerings by your seller with a fine toothed comb for prepayment penalties and not trust solely what your loan officer is telling you.
Any Piggs in the finance/mtg biz, pls, by all means take over the floor if am I missing something here.
