What Should I Do? Need Refinance Advice...!
I need some advice on what to do with my current mortgage. I bought my house at a discount about 13 months ago. We have and interest only mortgage as follows:
$135k @ 5.3% Fixed until 2010 ($605 payment)
$34k @ Libor + 2% (I think?) (last payment $258)
$169k financed
Our plan was to pay the interest only for 5 years WHILE investing $250/month in a relatively safe investment fund (The American Funds), hoping to make more than 6% return over the 5 year period…so far, so good. At the end of 5 years, the equity and the $15k (+/-) we have saved in the investment fund, would allow us to refinance at 80% LTV and avoid the PMI.
However, after following the increasing trend of interest rates, I am bit worried about being stuck with a high interest rate in 2010. So now I’ve found that:
My house will appraise for $225-235k.
I can refinance, buy down points, pay origination fees etc. and roll it into the total amount refinanced and end up with:
$179k @ 5.25-5.5% fixed for 30 years (80% LTV = no PMI)
What should I do?! Thanks for all of your answers and advice!
I guess I am concerned about what rate I will be stuck with on the 80% portion of my loan in 4 years. I would like to refi in 2010 and have a fixed rate.
Also, at the 5.25% rate, my payment will be $988....but at least some will be going to pricipal.
So you think i should just adjust my current plan by applying the $250/month to the 20% portion (which is a HELOC by the way) instead of investing it in a investment fund?
Thanks for the reply!
I read "5.3% fixed" and assumed that your loan rate will stay "fixed" at 5.3% for the duration of your loan term -- that your interest only payments will cease in 2010, but your loan term will still have another 25 years. I may have made some erroneous assumptions.
Tell us a little more about your first mortgage. What happens in 2010? Does the loan balloon? Does the loan convert to a fully amortizing loan for the next 25 years? If so, does the rate change to an adjustable rate and what is the index for your rate?
What about your personal financial situation? Why did you take an interest only mortgage loan just 13 months ago, but now you are talking about refinancing into a fully amortizing fixed rate loan? What has changed in your financial posture? Will your income increase over the next five years so that you can easily absorb an increase in your loan payment five years from now?
Did you structure your financing the way it is so that you could get 100% financing with nothing down?
How long do you plan to stay in your home? If you plan to move in the next three to four years, then your best strategy is to do nothing.
If you plan to stay in your home for the next seven to nine years, then you might consider an "EasyPay-10" loan offered by IndymacBank.
This loan has a fixed rate and payment for the first 10 years. After that, the rate and payment adjust every 12 months. During the adjustable portion of the loan, the rate increase or decrease is capped at each rate change. Also, there is a lifetime cap that sets a maximum limit for the rate over the term of the loan. The adjustable rate is based on the LIBOR index plus a margin.
Your initial rate and payment for this loan are generally less than for a fixed rate mortgage. If you anticipate rates to fall in the future, or if you intend to sell or refinance the property within 10 years, this may be a desirable loan to select.
I admit that it is a bit of a gamble. Noone can predict what the interest rate will be in 2010.
If you keep your current mortgage structure until 2010, I would still suggest that you apply the extra $250 per month to debt reduction on your second mortgage. You have to run amortization tables for your loan at your current interest rate to see what will happen.
What will be your loan balance on your second mortgage after 60 payments with $250 extra applied to the principal balance each month. What will be your loan balance 60 payments from now under your current payment schedule? I suspect that the difference between the two balances will be as much as $3000 to $5000 greater than $15K.
This suggests that you get much more leverage for your dollar by paying down your mortgage balance a little faster each month, than you get by saving the $250 each month at some rate of return that is likely less than your mortgage interest rate.
If after 60 payments you decide to refinance your loans, you will be refinancing a combined loan balance somewhere around $148K, maybe $152K if you add the closing costs to your loan balance.
Even if interest rates are one or two point higher than they are now, refinancing your much lower loan balance after paying down your second should still give you a lower monthly mortgage payment than you had before.[ Edited by NewKidInTown3 on Date 02/13/2006 ]
Newkid,
My first mortgage converts to a fully amortized loan for the next 20 years at an adjustable rate of Prime + 1%.
Honestly, we chose the interest only loan to be able to qualify for the house. It was a poor decision (looking back), mainly because the house we had was just fine. However, we did get a great deal on the house (we have approx. 60k in equity after 1 year) and we plan to stay there for the next 10-15 years at least.
Our financial situation has improved since then, and I figured that if a 30-year fixed payment would only be $100-150 more per month, then I should consider it.
Nevertheless, I have some checking to do. Thank you for your words of advice!