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Should I pay my mortgage down to 90% to lower my payment?

I purchased my home at 95% LTV two years ago and just had an appraisal come in $5k less than my original purchase at $390k.  I thinking of refi my current 7/1 ARM with a 7/1 ARM.  I can get a better rate and save $250 per month.  I plan on selling in 2-3 years.  Is paying it down a good idea?
  • June 23 2010 - Uptown
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Answers (6)

The way that I look at is you're going to paying $5,000 to make up the difference in value, and probably another $3,500 or so in closing costs to obtain the new 7/1 ARM.  That's a total of $8,500 you're investing, at savings of $250 per month you break even in a little under 3 years.  Are you planning on staying in the house for longer than the next 3 years?
  • June 23 2010
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That's not a financially accurate way to look at it. 

Any extra monies towards the loan balance aren't "costs" that go into the break even calculation.  You don't lose that money, you just lose access to it.  There's pro's and con's. 

The case for putting down extra money would be that you get a lower rate and/or PMI payment.  For example, if you put down $5k to save .25% on the whole loan of $360k, that's $900 in savings by putting down $5k.  That's far better than most checking accounts.

To the question, it might/might not make sense to put down the money.  It won't likely change your mortgage rate, but your mortgage insurance rate.  I'm guessing a +/- $370k loan in 2008 is about $360k now.  Still, I'm thinking you're more like $13k to bring the loan to a 90LTV.  It may/may not make sense.  I can't paste a table in the zillow Q&A interface, but I have a calculator for that.

Rates were mid-5's on ARMs in June 2008.  I don't know the specifics of your qualifications, but I don't see how a no closing cost refinance saves you less than 1%.  That's pure savings of roughly $3,600/year in year one with no investment of costs to recoup.  You're ahead from day 1. 

Just my $.02,
  • June 23 2010
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Thanks for the comments.  I just found out that the PMI might be $260 which reduces my monthly savings to $200.  I have to bring $14k (+$2k closing costs) to get it down to 90%LTV.  I'm going from 5.75% (w/ LPMI) to 4.25%.  The reduced interest cuts into my tax return by about $1,300 so the $2,400 annual savings goes down to about $1,100 once the tax deduction are considered.  I have to decide whether it's worth it to tie up $14k cash to save net $90/month or try to find a lender that will do LPMI on an ARM, something this lender won't do.
  • June 24 2010
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I doubt it cuts your tax return that much. a $2400 interest savings would cut your tax return about $720 at the 30% tax bracket...
  • June 24 2010
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You had me at "once the tax deductions are considered."  That's the correct way to evaluate LPMI if you are either over the income limit or in the home past the expiration of the PMI tax deductibility legislation as it stands today. 

There's something wrong there.  Your PMI factor is 40% higher than it should be.  The PMI rate you pay does vary, similar to mortgage rates, based on the size of the broker/banker you are working with.  That could be part of it, but 40% is a huge variance. 

I have a question though:  Why the 7 year if the sale is in 2-3 years?  You're effectively in a 5 year ARM (2 years into a 7/1 ARM) and you are refinancing for savings--not for a term extension.  If so, a new 5/1 saves an extra .25-.375% relative to a 7/1 and does not alter the risk.  You'd be paying an extra $900-1300 a year in interest for rate lock protection in years 6 and 7 that you don't intend to use. 
  • June 24 2010
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I was suprised with the PMI as well but I got that quote from two places.  I also received two quotes in the $160 range but that was from companies where I did not complete a full app so I assumed that it would go up once I provided them my info.  One bank told me it would be between $190-$260 but I don't really want to drop a $300+ app fee to find out which one.  $70/mo. changes an offer from good to ok.

As far as the arm goes, one bank wouldn't do a 5/1 > 80% LTV (due to declining market) and another told me pricing was similar so go 7/1 for added security.

As far as the tax deduction, 5.75 to 4.25 would save almost $6k in 2011 interest.  Based on my bracket and 2009 tax rates that is about $1,300.
  • June 24 2010
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