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fixed or adjustable?

I have a adjustable rate at 7.8% pick a payment, and looking to lower my monthly payments without increasing my debt.
I know next year my payment should go down a little, because of the last 12 month average is rated for the next year.
the mortgage company quoted me for a 30 year fixed 5.75% at a $200  higher monthly payment, included was a PMA, and tax impound, in which is not the case with the adjustable rate.
My question is what is better, refinance or keep the pick a  payment?

  • January 24 2009 - Hacienda Heights
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Answers (3)

Best Answer

What you're comparing is the principal and interest payment on your "Pick-A-Payment" loan (or Options ARM) with the principal and interest, taxes and homeowners's insurance (PITI) and PMI on a conventional mortgage. Thus, we can not make a determination here without additional information.

To determine whether or not a refinance makes sense in this case, you need to compare only the principal and interest (P&I) payment on the new mortgage with that of the Options ARM ("Pick-A-Payment" loan) to determine whether or not it's worthwhile for you to refinance. Then account for the PMI with the principal and interest on the new mortgage with the P&I on the old mortgage and see if it still makes sense to you.

  • January 24 2009
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If you can afford the 5.75% (which underwriting will actually determine based on your debt-to-income ratios), it would not be a bad idea.  Those Option ARMs are not doing anything worthwhile in declining markets. 

If you are stricrtly paying the minimum payment, however, you may not want to or even be able to refinance out of it.  Paying the minimum implies affordability issues in most cases (generalization).

But if your payment only goes up $200/month and you are paying down principle AND interested vs. your current minimum payment (negative amortization), I would suggest you take the deal and run.

Good luck!

  • January 24 2009
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jt, not knowing your entire scenario makes it difficult to give you a definitive response.

In general terms, with good to excellent credit you could receive a lower rate. Most option arms have prepayment penalties (p/p/p/). Look at your loan docs to see how long your p/p/p is. Also, most folks with that type of loan only make their minimum payment. That results in negative amortization. Add that to declining property values and you may find you owe more on your property than it's worth. Thereby, refinancing would not be an option.
  • January 24 2009
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