Need advise on refi

[SDowner]

hi all,

bought a property in SD in May 2004 (ducking to avoid the sticks thrown at me). let me list the
mistakes made
1. buying without researching the market or knowing anything about the bubble.
2. got an 5-year ARM and an HELOC.

mistakes avoided
1. bought in good area with good school district.
2. primary residence, not investment property.
3. int rate of 4.3% for 5 years on the first loan.
4. no prepayment penalties on either loan, with lifetime cap of 9.3%.
5. knew all the terms of the loan, but went with an ARM for freeing money for investment.
6. based the payments on the salary of one spouse, while other will work by the end of 5th year.
7. will not move from the area for at least another 5 years.

had 5% down during buying, but have paid down the HELOC in these 3 years (which was fixed after the first year with no closing costs).

current dilemma: refi the first loan into a fixed 30-year right now at 5.8-6.25% or wait until the ARM ends in another 2 years and refi? According to data available and this blog, the housing prices are going to drop 20% in another 2 years, in that case i need to refi now, but I would be giving up a very low interest rate for 2 years??

[forsale_2007]

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.

[SD Realtor]

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

[SDowner]

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

[recordsclerk]

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.

[guitar187]

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%.

[recordsclerk]

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%.

[guitar187]

recordsclerk,

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

[recordsclerk]

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.

[SD Realtor]

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

[InCarmelValley]

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?

[temeculaguy]

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.

[SDowner]

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

[sdrealtor]

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.

[guitar187]

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.

[Author]

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