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Our ARM will become an adjustable loan soon. What should we do?

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stinaac

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We plan to keep the house another 3  years or so but you never know if it'll be longer with this market.  We have relocated so we are renting the house out.  It was on the market but when we refinance it will have been one year since being on the market.  We really want to avoid the high costs of closing costs.  Now our loan is 5.75% and it's interest only.  We put down a lot so we have I'd say 30% to 40% equity in today's market.  What kind of loan should we get and what costs can we avoid when we refinance? Can we avoid the appraisal since we have so much equity in the house (we originally bought in 2006).  Thank you so much.
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June 21 - US
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Jim Dake, "JimInManchesterCT"

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As the personal injury attorneys say, Know Your Rights!  It's a very smart idea to make an additional principal payment every time you make your mortgage payment -- you build it into your family budget and you will adjust OK -- just like contributing to a retirement or education plan (or taking out another credit card, ugh).  If you pay by check, follow Clay's instruction below -- also, most of the online automatic payment programs provide a separate line for this, if you pay that way.  There is NO need to pay an upfront or annual fee for this, those are just add-on revenue-generating programs for the mortgage servicers.

If you're not comfortable doing time-value-of-money math, any decent loan officer or financial planner can help you target how much you want to drop your balance, and calculate what increase in payment will get you there.  If you post the current balance on your loan I'm sure you'll get an answer here, the rest of the info needed to calculate it is in your original post. -JIM
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June 22
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Rudi Hofmann, "CA UMB"

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You can pay down principal every month if you wish. If you do, the following months payment will be lower. ..... If you have a prepayment penalty you cannot pay down your loan more than 20% a year or you will accelerate the prepayment premium. ..... Best wishes, Rudi
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June 22
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Clay Branch, "Georgia Loans"

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stinaac, you can pay extra principal anytime you want. Send a seperate check along with the regular payment stating the extra check is for principal reduction. Martin's idea to ask for a loan modification is a great one, try it, it would be free.  
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June 22
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stinaac

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At what points can we put down more principal - thus reduce our interest payments? Only before it readjusts or only after each 12 month period? Can we put more down inbetween the 12 month period? Thanks!
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June 22
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Jim Dake, "JimInManchesterCT"

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You've got a decent ARM -- for now, probably the next couple of years anyway.  A lot of the horror stories involve loans with 5% to 6% margins above LIBOR and big first-time adjustments.  Those folks are looking at rates going a lot higher than yours.
What you need to look out for is a recovering economy where the Fed stops trying to keep interest rates low.  LIBOR was running 5.0 to 5.5% during 2006, and in more inflationary times was north of 8.0%   (Link)  
So Roberto is spot-on, if you are unable or decide not to refi into a fixed loan (still not a bad idea if you think you'll hold the property), try to pay down principal so when rates head back up the impact on you is less severe.  Good luck to you!
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June 21
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Several of our investors have had their loan payments adjust to lower interest rates.  Wait and see what you can get where you are before paying the re-financing fees.
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June 21
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stinaac

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Wow, this is great news! I automatically thought we HAD to refinance because of all of the horror stories you hear about loans readjusting.  Our current lender did not tell us these options. He didn't even tell us we would have to pay a higher interest rate when refinancing since this is considered an "investment property".  Unfortunately we have to wait until mid February, since that is when our 5 year arm will readjust. Hopefully the LIBOR will still be low at that time. Thank you again for all of the great advice!  BTW, what will our approximate principal monthly payments be? We have a loan of $403,000 and it will be the beginning of the 6th year.  Thanks again!
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June 21
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Roberto Ribas, "azrob"

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libor rate

one year libor looks like it is about 1.7 or so, your rate is going to adjust downward to about 4.5 percent. I'd seriously consider keeping this loan, unless you are darn sure you are staying in the home forever. save money/ pay extra to principle for the worst case scenario, that a few years from now rates move up alot.
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June 21
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stinaac

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Okay, so here's the info.  Please explain this to me - I'm confused. Should we stay put or refinance? I never thought of staying put but this would be a great option!  Here it is: The index will be based on an Index (one year London Interbank offered rate (LIBOR)). Before each change date the note holder will add 2 3/4 percentage points to the current index until the next change date. The interest reate will not be greater than 10.750% or less than 2.750%. Thereafter, my interest rate will never be increased or decreased on any single change date by more than two percentage points from the rate of interest I have been paying for the preceding 12 months. Is this on okay deal or a raw deal?  What do you think we should do? Thanks so much for all of the great advice!
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June 21
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Martin Wareing, "Martin Wareing"

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stin,

Sit tight and hope for the best...  INV mortgages are the same rates, however the closing costs and point add-ons for the same rate will make you want to reach for an air-sickness bag.  good news... LIBOR is OK as we speak.. so good year, bad year, OK year over the next 3 years would be averaged as 3 OK years (see Clay's quick math).  Anyway, refinancing might have a potential 6% in costs (INV loans are very pricey even if your credit walks on water) and much worse if you scores are at 739 and below (see air sick bag comment)  :)... If you are concerned with your ARM... contact your service as they are concerned with it as well.... You never know, they might "modify" the terms Free of Charge without you having to be in default.  A friend of mine was offered it (had 3 year ARM and moved out as well)  was offered a FREE MOD...  The circumstances for this were lender related.... INDYMAC was trying to save their ship by converting any and all ARM loans to fixed prior to Sheila Bear and the upcoming FDIC raid to take over their collapsed bank.  never hurts to ask.  Good luck to you.
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June 21
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Clay Branch, "Georgia Loans"

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No, you have caps on how much the rate can increase per year and lifetime, unless your loan is a Heloc.  
You cant know exactly what the change will be until you get to the month of the change but we can tell you what it would be today if it adjusted, based on your terms. You most likely have a 1 year index so when it changes, it will be locked at that rate for 1 year. Lets say it adjusts down to 5%, then up to 6% next year and 7% the year after that. That would be an average of 6% over the next 3 years and saves you thousands in closing costs since you will probably get a rate of aprx 6% now. Look up the terms and tell us the margin, index, and if a floor is stated.  
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June 21
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stinaac

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Even if the loan drops in it's rate from 5.75% (I still have to check the terms of our margin), there's no guarantee, right? So if the rates go up to 12% in a few months, that's what we'll have to pay. Is it worth taking the chance and letting it adjust monthly rather than refinancing?  We just signed a 2 year lease with our tenants. 
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June 21
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Lew Corcoran, "Lew Corcoran"

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Because you are renting out your home, if you were to refinance it today, you will have to get an investment property mortgage. Interest rates for those mortgages are higher than they are for primary owner-occupied or second/vacation homes.

If you had your property on the market but did not sell it, some lenders will require a 6 month wait before you can refinance. Others will require that you wait as much as 1 year before you can do so. There may be some who will let you refinance with less than 6 months since the listing expired or was withdrawn, but personally I'm not aware of any.

The purchase price and the amount you put down when you bought the property is irrelevant. What is relevant is the market value today, the balance of your current mortgage, and how much you want to refinance. Because property values are declining in most parts of the country, lenders will require you to pay for an appraisal. The lenders want to protect their interest in the property, and they have to be assured of its value before they will lend you any funds.

The only way to avoid closing costs is to opt for a higher interest rate loan. There's no such thing as no closing costs - despite what some lenders may advertise. There are always closing costs - it's just a matter of who pays them or who pays what portion of the total. If you want the pender to pay for some or all of the closing costs, they will exact a higher interest rate so they can pay them for you. It's a trade off, and only you can determine what the appropriate interest rate / fee combination is right for you. Good luck.
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June 21
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Clay Branch, "Georgia Loans"

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Your loan should drop in rate if about to adjust, look at your NOTE and tell us what the terms are for your margin, index ( Libor of Treasury ) and if there is a floor on the rate. There is now way around paying closing costs on a refi and your loan will be priced with non owner occupied terms, higher rate than owner occupied and/or higher fees. 
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June 21
 

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