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.Is now the time to refinance a one year arm that is currently 4.25% and set to reset in June 09?

I plan to stay in my home another  10 years.  I have a quote to refi for  30 years at 4.875 but that includes 1 point at $2,380 and refi charges of $3800.  My monthly P&I would drop by $2.00 but be locked in for 30 Years and I would not have to worry about the rate rising for the rest of the time I live in the home.  Am I losing anything by doing this deal?  I owe $238,000 and the home is appraised at approximately $620,000.   
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December 20 2008 - Vienna
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Answers (20)

On the APR; not using a floor to quote is a loophole and not based on the intended Spirit of the APR.  I also stand by my opinion that each client needs to understand an APR and use it for his scenario.  (Are you selling in 4 years?, Then use a 4 year Balloon to calculate his/her APR etc)

On W. F. negative APR, I think they are following legal statutes but it is a loophole and as I strongly feel, against the spirit intended of the APR.  We will see what happens with C. C. Banks, Class action suit because of this exact loophole. The Court is deciding this very issue on disclosed APR.  You can legally rescind a loan based on false TIL. Many "Loan modification and Foreclosure companies" are really legal firms using this same "False advertising to rescind a loan and save a home defense"

Do you think a negative APR accurately and easily discloses the cost of the loan to a consumer?  Points, fees and origination of the credit obtained?

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January 12 2009
Clay, You are absolutely right on the ARMs,  They have a CAP up OR down.  The floor is seldom addressed since since just recently the ARMs start rates have been substantially above 30 year fixed rates.  ARMs lamost always had rates well below the 30 year fixed. Wells has instituted a floor of 4.25 on all Helocs and I suspect this will com into play with one year tbills at Zero point three seven %.

I stand by my advise to "b spindle", that it does not make sense to refinance at this time.  More so if you do not have a floor on the Note.  I know some do have floors but they are based on the margin. (Can not go lower than the start rate - margin)
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January 12 2009
 Fannie Mae 5/1 Hybrid ARM Majors
The 5/1 ARM also features a 5/2/5 cap structure indexed to the one-year Wall Street Journal London Interbank Offered Rate (LIBOR), meaning that the interest rates cannot increase or decrease by more that five percentage points at the initial adjustment date, no more than two percentage points at any annual adjustment period, and no more than five percentage points over the life of the loan.

No rate floor
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January 10 2009

Jaime, I have no idea what you are reading but neither conforming or Jumbo Arms have a rate floor. See Fannie guides in the next post. My opinion of your advising the OP is poor. Now you say he can refi anytime. If you read his post a few times you may pick up on his statement that the GFE for a refi is LOWER by $2/month, which means he does not know what his rate is, he typed the wrong rate, or he is dropping MI. The bottom line is he has a 1 year arm and he is weighing his options as to refi now for the safety of a fixed rate and keep the same payment. It's real easy to hit him with his recapture time, tax consequence, and some BS about his APR but he is looking for some guidance and you have not given him any.

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January 10 2009
Clay, it is simple math.  Wait until the cross over.  His rate is way below 4.875.  Do not forecast rates, look at them as they are,  Today. 

He can refinance anytime, Rates are posted daily. Until current cost of his money goes cheaper than present cost, No deal.

I just looked at conforming guidelines and they do have a FLOOR.  the adjustable's I used to make were at 1% for this reason.   The start rate is always the floor.  Correct me if I am wrong.  I have not recommended an adjustable in a long time.  I tell clients that come to me to refinance these Adjustable to hold to them as they are good as GOLD. To say "NO DEAL" as they say
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January 10 2009
Jaime, so you propose he keeps his 1 year arm and if so, until when? Lets see your mortgage advising skills, tell it.  
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January 10 2009
Clay, what you are so wrong it is not even funny.

You say "2.00 saving and he will not have to worry"  Help me people...

You propose his rate to go from 4.25 to 4.875! not even considering the big closing cost charges or what he spent 3 years ago?  His total interest payments over the life of all loan will increase sharply and have over 40 more payment for what you call peace of mind his rate will not be over 4.875%.  This is so wrong in every way.  He just purchased this loan about 3 years ago, I can tell with out him even saying,  40 more payments to fix his loan and save two dollars?  Clay, is this the way they do business in Georgia?
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January 10 2009

Short term loans are also not following your theory. The same purchase LOC I got 6 months ago for a client was at Prime and it is now Prime plus 1.5% from the same lender. Once the economy shows any kind of growth, the Feds will start screaming inflation everytime they open their mouths and rates will start climbing. I do not claim to know when that will start or what the price of a 30 yr mortgage will be next week, but I do know the 30 year rate fluctuated between 4.5 and 4.75 last week so not even 4.5 is solid for now.The OP stated he was quoted 4.875% and you say it is not a good rate because of the yield on the 10 yr. The important thing to the OP is his quote is a $2 difference from his current payment and he wont have to WORRY about the rate rising for the rest of the time he lives in the house. Do you get that?   

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January 10 2009
Sorry, was watching football.
Jaime, your prediction that rates could go in the 2's is bizarre. I did not say rates are in an up trend. What I did say it that I GUESS the index on which his loan is based, would be back up to 1 or more in June ( aprx .49% now ) when his loan adjusts again. You say your opinion is based on the 10 yr yield being at 2.39% would historically price a mtg at 3.75% on the high side. I agree with that except reality is that the best priced 30 yr mortgage on Friday was 4.5%. That is because the rate is not dictated by that index. If it was it would be priced there now. Investors in mortgage securities are pricing in more risk causing the spread between MBS and the 10 yr. It's not just the 10 yr and fixed rates, Arms are also priced the same way. Friday a 5/1 Jumbo using the CMT index is 4.875% but if that same loan was adjusting today, it would get a rate of 3% since the margin is 2.5 and index is .500. That is almost a 2 point spread. So your basis of T Bills does not hold there either. Stock traders are chomping at the bit to rally that market and once it starts, that giant sucking sound will be the sell off of treasuries and the money going in the stock market. Everyone lost a ton of money last year and they want it back and buying T Bills just wont get it for them. TO BE CONTINUED ON THE NEXT POST 
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January 10 2009
OT: (Off topic) Sorry guys,&gals.

Rudi,  Escrow companies follow lenders directions.  You are not the lender, your are the Broker or Originator. My comments on APR are that your APR as disclosed on the original application will not match the lenders or that which the escrow company makes in behalf or the lender.

Yes, the escrow companies APR will match the lenders, that is their job.  It is your APR that does not match the lenders since they will be responsible due to Regulation Z.

Your Hewlett or whatever LOS you use is only as good as the numbers you input in them.  The problem is that most originators do know how to input the correct numbers, IE my comment that the lenders APR will not match the originators.

Did you ever originate a 2/27 or 3/28?  Go back and see what you disclosed to your client and see what the lender had the client sign. There is a 99.9999 % chance these did not match.  Your HP or LOS did it correct but the output is only as good as the input.

On Clays comment that rates are Low, Rates have been dropping since 1981, 16% down to today.  We are in a Secular downtrend and you can always say rates are low since they keep on making new lows. Saying you must refinance a 4.25 note rate to 4.875 rate because rates are low does a dis service to your client.
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January 10 2009
Jamie, now we all know who to call since our HP12C or our LOS or the program that escrow and our lenders use doesn't comput APR correctly. ... Thank you!

PS: I think Clay was basing his comment on Historic Rates. 
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January 10 2009
One more point most newbies miss or understand. Remember an MBS (mortgage back securities) are notes and the higher the yield the lower the price and vice versa.  The APR should equal at each interest rate offered. Reality is different than the math because of pre payment risk.  The higher the yeild the higher the chance of losing that income stream due to a refinance. 

Somehow many mortgage originators are screaming and do not understand how these premiums or a higher yield is not priced with higher YSP's.  It is called "convexity".  Convexity occurs at very high yields, yields are relative and this just screams that interest rates are going lower, much much lower.

One needs to understand this convexity in pricing of mortgage backs. 

There is no free lunch.  Convexity is presant and until it is priced out, Mortgage rates will continue to decline.
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January 10 2009
Clay, With all due respect, Your call that rates are going up are as valid as mine that they still have a ways to go on the down side.  Your "opinion" that 4.875% is low is based on what? 

Mine are based on: Rates on 5 year T. notes are way below TWO! "1.51%", Rates on 10 year notes are "2.39".  Historically this would price a Government back note (which CONF  loans are) at 3.75 on the HIGH side!!!!

But more important prices on 2010 paper shows even lower yield.  T.bill have yeilded negative rates many times since October.  NEGATIVE my friend. 

Fannie Mae has announce they will start issuing 2.5% mortgage backs!  Reality is that rates will and are going lower.  How low? no one knows but they are definitely not on an up trend.  Let the trend be your friend.  Teach your client how to analyze a mortgage and stop creating fear and selling them on this fear.

FYI, TIPS are pricing in a 5% decline in assets (-5.00%)next year so reality is that you need to add 5% to an interest rate to know what real cost is.  4.875 + 5.00 is 9.875% real the rate.  WAY TOO HIGH!

Sorry this is OFF Topic but read my advice given on questions and tell me if I am a spammer or maybe know a little about Mort gages.
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January 10 2009
bspindel, if you are still paying attention to this thread, since you posted on Dec 20 and this was pulled back up, then you should take the fixed rate. Based on your 1 year anniversary date and current rate, it looks like you have a treasury based arm and a 2.25 margin. If it were to adjust today the rate would be 2.74% but it wont adjust today. It's anyones guess what the index will be in June and my GUESS is that it will be back up to 1 or more. That would still give you a great rate for 1 more year but fixed rates will probably be on their way up again so you will have missed out on getting a fixed rate at 4.875, or lower. The comment here about 30 Yr fxd rates going in the two's is just bizarre.
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January 10 2009
BS, Absolutely not.  Without know all the specifics, the general answer for: "Does it make sense; is to divide your savings buy the cost"

That alone gives you a 3,090 month break even! #EeeeGads

You are re-amortizing your loan over 30 years to get the PI lower.
You are at 4.25% and willing to RAISE your rate?  I suspect this is the only reason you can get a lower payment. Look at the total interest paid and add that to you total paid to date etc. 

You need to Look at the APR, not the one given to you by a salesmen. You need to understand the APR and calculated yourself if your mortgage salesmen is not willing to do it.  You need to amortize your cost over the life of your presant loan. You must re calculate your APR considering what you did with the last refinance or purchase. You also need to consider your tax bracket.  It is not a blanket statement since each client is different. 

 With a 4.25% rate you must have had thus MTG for many years. Was it a Refi or a purchase, how long did you have it.  Is 4,25% the floor or is it based on a 3:1 and this is a first adjustment.

You need to calculate your cross over and 30 year rates need to be well below your presant cost of money.  That crossover will trigger you to be vigilant and ready to refinance.  (IMHO with rates FF at .25% 12 month libor below 2% does not indicate any rise in mortgage rates any time soon.  If anything expect 30 year fixed in the Two's.  Fannie may opened the 3% a couple of weeks ago.)

Moral of the story, REG Z,&APR,
Learn how to calculate your personal APR not the one a salesmen feeds you. (FACT:  over 90% of Truth in lending statements you sign at application will not coincide with the final one at title)
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January 10 2009

Try working directly with your current lender!


With that kind of equity they should have no problem refinancing it. And they have a reason to try to keep a good client like you-- they want to make their money over time. They may be willing to do it with no-closing cost / no points. And simply lock you at your current rate.

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January 10 2009
This is a hard question to answer fully, simply because of the unknown in the market ahead. Certainly, the Federal Government is trying to keep rates artificially low. What will happen when this pressure is relieved? I think the consensus is rates will rise. So, I lean toward agreeing with fixing your loan and forgetting about it, since 30 year fixed money is darn close to the rate you have with your ARM.
Best Wishes, Jim
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January 10 2009
If you haven't done it, do it. The hardest thing for my clients is when rates bump back up and that super-low rate is history. 10 years of good sleep!
Good luck!
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January 10 2009
What is the percentage of your adjustment...in other words, will the rate jump 1%, 2%.  If so then the 4.875% might be a great deal.  You won't realize the benefil until after the adjustment.

For example; say your 4.25% is based on the $238,000 (not knowing what your original balance was), then your P&I would be $1170.82, a 1% increase in the rate would be an additional $143 per month a 2% increase would be $$294 per month.  If you have a 2% increase coming then it would take you just under 3 years to see the benefit.  If you plan to stay for another 10 years, that is a savings of about $14,000+ in payments from the beginning of the 4th year on.

You would still save a little if the increase is 1%, however to me, it would be piece of mind knowing I wouldn't pay more than 4.875% for the life of the loan, no matter what the market did. Good luck :)
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December 23 2008
I think you should ask yourself the question what is going to put you more at ease. Although I don't see rates rising immediately, I would bet they'll be higher when your ARM resets. Mortgage interest rates are always highest in the Summer and lowest in the Winter. I hope this helps!
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December 20 2008
 
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