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Profile picture for zippinova

Do I refinance?

I have a 5/1 interest-only loan (current 5.875%) that will adjust is 3 years.  My home is worth about the same price I paid for it (recently appraised). 

My wife now thinks we're going to sell this home and go elsewhere before the load adjusts.  Obviously that is dependent on the market and if we're willing to take a loss (hopefully not an issue in about 2 years).

We have locked in a 5.5% 30-yr fixed, fully amortized loan.  Should we refinance?  Our new monthly payment will increase approximately $300 due to the principal.

My wife doesn't want to be forced to pay principal (with a fully amortized loan) because our home isn't appreciating in this market.  Is that a fair point?

I look forward to some advice.

Thank you.
  • December 31 2008 - Richmond
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Answers (17)

Profile picture for Ken Kopper

What is loan size and what is LTV on the transaction? Are you looking at doing conventional loan or FHA loan? Do you qualify for VA financing?

As you can see, lots of variables to consider here. You want not even be getting the best rate out there depending on your scenario..Did you post a loan request through Zillow?

  • December 31 2008
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I think her point is fair.  Having multiple options is always better if you are able make informed decisions on which option is best at any particular time.

If you think there is a good chance you sell within 3 years, keeping the existing loan seems OK to me as it will allow you to avoid the costs of a refinance.  If you were planning to stay longer, the 5.5 would be more attractive to eliminate uncertainty for the equation.

One last point about selling and taking a loss...this is a psychological trap.  Purchase price should not have any bearing on a decision of when to sell and for what price.  Looking backwards has little benefit.  Looking forward is always best.

  • December 31 2008
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The issue of interest only is something the two of you must resolve. Property values will probably continue to depreciate for the next year or longer. 5.5 fo a 30F is high unless it included all fees.
  • December 31 2008
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in regards to your wife's point, while it is fair, it means little. You will have to pay at some point, whether that is now in the form of payment toward principal, or when you sell, in the form of money out of your pocket. No one likes paying more than a home is worth, so when you go to sell it, you may have to bring money to closing to get it done. It's kind of a crap shoot because none of us knows what is going to happen. Tough call, and it probably comes down to monthly payment. If you like the IO payment THAT much better, stick with it. Especially if you think you'll be out of there in three years.
In regards to the rate- 5.5% seems high unless you are doing a no-cost refinance. Ditto Rudi.
  • December 31 2008
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Profile picture for zippinova
Ken - Loan size is about 320,000 and LTV is about 80/20.  Definitely a conventional loan, and no, do not qualify for FHA. 

I did not post a loan request through Zillow.  I got a competitive rate and have already paid for the application fee (inc appraisal) and rate lock.
  • December 31 2008
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Profile picture for zippinova
My ultimate question deals with paying principal on a depreciating home value..  Is it worth it?  Or because we have I/O should we keep the loan and make sure we move before the rate adjusts?

I don't want to pay principal if it's going into the toilet because of a depreciating home value.  Is this true?  Thank you!
  • December 31 2008
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Profile picture for zippinova
Jennifer -- Can you please explain?

"No one likes paying more than a home is worth, so when you go to sell it, you may have to bring money to closing to get it done."
  • December 31 2008
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zippi- you say your wife does not want to pay toward principal. So, when you try to sell the home, you will still have the full mortgage amount, plus transfer fees, plus realtor costs. If houses continue to depreciate, and you have NO equity, no one will want to buy your house for what you owe- they will only want to pay what it's worth. If you want to close, you will have to bring money to closing. Could be $5000, could be $50,000. No one knows. Like I said though, it's a tough call as we really have no clue what is going to happen, and you have no clue as to when you will actually move.
Also, 5.5% is not a 'competitive' rate, for conventional financing, unless you are paying nothing out of pocket, and adding little to nothing to your loan balance. 
  • December 31 2008
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If you are truly at 80%  equity, stick with what you have, and put the house on the market in two years, or two and half. That should give you time to get out of dodge, assuming your rate will adjust upward when your fixed period ends.
  • December 31 2008
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Profile picture for Ken Kopper
Zippi, I have done several loans this year in Richmond for former customers that I had done loans for in the past few years and to tell you the truth, Richmond's value have held pretty steady especially compared to some parts of Northern VA where properties have fallen significantly. By 80/20, are you meaning that your loan amount is 80% LTV of the appraised value?

.5 pt in rate on 320k should lower your payment about additional $120/month and 5% is out there paying some origination..Most brokers get alot of their business from referrals so its in your LO's best interest to present you different options to best prepare you to make an educated decision. As a matter of a fact, I get alot of referrals from applicants that I reccomend not to do a loan simply because I put their interests before mine (getting paid)
  • December 31 2008
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Profile picture for Planners
Are you paying any points or closing costs for the refi? If so, it's probably not worth it.

As to paying principal, I guess that only matters if you think you might let the lender foreclose on the loan. Otherwise it's a matter of pay the lender now or pay them later.

Tom O
  • December 31 2008
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Profile picture for zippinova
No points and little closing costs (less than 2500).

Tom O -- Mind explaining?  "As to paying principal, I guess that only matters if you think you might let the lender foreclose on the loan. Otherwise it's a matter of pay the lender now or pay them later."

Thank you
  • December 31 2008
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what you just have told, please stay with your current loan if you are planning to move, cause any closing cost you are going to pay it'll take at least 5 years to recover before you start to see any savings ( average).
  • December 31 2008
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Profile picture for Planners
I'm with ShanPru- the refi costs are too high for the interest savings you are getting. I would not do it.

As to your question, you have to draw a distinction between cost and cash flow. While the interest only does give you better control of monthly cash flow, any principal reduction you do now means there is less principal you need to pay when you finally pay off the loan. That's what I meant by paying the lender now or paying them later.

Regards,

Tom
  
  • December 31 2008
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You probably should stick with what you have. At 5.75% interest only this is equivalent to a fixed rate in the high 3's or low 4's. Plus, you mentioned your payment will go up and you may not be staying in your home long-term. Most of my clients are about the lowest payment. You have this now. Good luck!
  • January 01 2009
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Zippi,
Keep what you have and pay a hundred or so dollars each month toward the loan balance: whatever if financially comfortable for you to do.  If you refinance, in Virginia, your closing costs will be at or above $3,000 because Virginia (and your county) will charge transfer taxes even when it is a refi.  So, just in that you will pay about $800.00.  A waste of money to you in your situation.  The money paid in closing you can use over the next three years to lower your loan balance.
5.50 on a Conventional loan is not competitive today unless your credit scores hover around 660 and you don't want to pay any points.  If you have credit scores at 720 or above, 5.00 and even 4.875 with no points is where the market is at right now.
  • January 01 2009
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Good evening, and thank you for your question. Obviously, if you are selling before your original loan adjusts, I do not recommend refinancing, as I doubt you will recover your transaction costs for refinancing. A quick cost-benefit analysis can answer that part for you. If there is any chance you are staying longer, or may wish to use this property as a rental, then fixing the rate lower than your current rate makes great sense. I would not recommend to you an interest only loan, but they are available, and the additional cost for interest only with most lenders is again very reasonable. Good luck with whatever you decide! Jim
  • January 03 2009
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