should I refinance my option arm loan?

Question

I bought my house a year ago and got into an option arm loan because we weren't sure we could afford the payments. Now, my fiance and I have gotten salary increases and we are paying interest plus principal. We paid $600,000 for our home and put 20% down with our parents' help. I am afraid that interest rates are going up again and that the payments are getting higher and higher. I am not sure I should refi because I have to pay a pre-payment penalty of 3 months of interest which comes out to 13,000. Should I bite the bullet and refi now at a 6% interest rate or should I wait another two years and then refi. We orginally planned to stay at this home for only 3-5 years but now I am thinking we are going to stay for 7-10 because of how the market is.

i figure that even if my payments are $500 more a month it would come out to 12,000 in two years which would still be about the same. In two years my prepayment would end.

Answer 1

Well you are really asking if interest rates are going up and my opinion that is a great big yes. If I were in your position I would RUN to a lending institution and secure a fixed rate loan because of the instability of the market not only right now but in the short term future (2 years) plus a.r.m.'s are just bad. Please consult a good CPA or consultant it is more that worth the cost of the office visit.

Answer 2

Refinance now. I doubt you will keep this loan the full 3 years because of the prepay when it will cost you more in interest over the next 2 years. People have to eat these prepays all the time and if the mortgage brokers were upfront about what an option ARM is, this would not be happening everywhere you turn. The good news is that a new type of option ARM came out where you can fix in your rate for up to 7 years and still have a minimum payment option. You have the security of knowing your rate is locked in for a fixed period of time and the ability to pay a minimum payment that is more affordable. You also have 20% down into your house as well.



It sounds though like you do not want any type of option ARM and I would refinance to a fixed rate now. Do not even bother with an ARM considering the bond yield curve is inverted and 5 year ARM’s are receiving the same rates at 30 year fixed rate loans now.



One loan to consider would be a 30 year fixed interest only. YES, they do exist now! You can lock in your rate for 30 years and still have a 10 year interest only period with no negam. Great for safety plus lower payments. I bet your rate on the option ARM is at least into the 7’s or maybe 8’s. Now you can refinance into the 6’s and be fixed. The interest you save will trump the prepayment penalty that you pay. By the way, 3 months interest for a prepay is not bad on the option ARM, it is usually 6 months interest. I would go here to check out more info http://www.scottlushing.com/mort101/index.html and play around with the payment calculators. One thing, new data came out today raising the bond yields which raise rates so you can kiss your past quotes goodbye, I assume rates will be at least .25% higher than they were last week this time.

Answer 3

Get out of the Pay Option Arm and into a Fixed Rate asap. Reason is because your Index and Margin will change with the market. If the market raises so does your payment. So you think in the next two years you are going to only lose 12k. Might lose more if that index and margin get into the double digits. Secure a fixed rate. Best loan if you want the security of a 30 year fix is a 30 year interest only loan.
First 10 year two choices interest only and fixed. If you stay longer than the loan just gives you only one option and that would be the fixed.

Reason you got into a 3 year prepayment penalty is because the LO who gave you the loan made 3 pts from the bank for putting you into a prepayment penalty. Plus the LO probably charged you 1 point orgination. So he/she got 4 points on your loan amount. Calculate that and see if they were looking in your best interests. First Time Home Buyer's should not be in this loan. Pay option arm is for serious investors looking to flip there properties fast not permanent Home Buyer's. Why do you think there are so many foreclosures.

Bottom line. Fixed rate.

Answer 4

The best advice I can give you is to talk to an experienced mortgage lender one who can work up the options for you (cost to refinance and cost to stay in the loan). On the pay-option type of loans if you only make the minimum payment you may go into a negative amortization (the interest payments you are not covering will be added onto your loan balance). What happens is you end up owing more on the loan than the amount you originally financed. I work for a mortgage banker that doesn't even offer those loans as so many people have lost their properties because of them. Rates are extremely low right now - 30 year fixed rate at 6.125% - 15 year fixed around 5.875%. A smart lender will show you your options and help you make the right choice.

Answer 5

You're really asking if rates will go up or down. No one knows that. If they did, they'd be rich.
The prepayment penalty is a deal killer. You'll probably never get into a loan with a prepayment penalty again, right? Does the penalty expire after 2 years? Is that why you'd wait?
Probably would take a heavy interest increase on your ARM to make it more costly deal! You should try to calculate what kind of increase it would take.

Answer 6

ouch, pay option arms can be dangerous, but as long as you make principal & interest payments you should be fine. i say hold out, but it's a gamble either way.... just make sure to refi before the 5 year recast. good luck!

Answer 7

I would refinance now r u sure the 13,000 cant be rolled into the note at time of refinancing, also u may get money back after refinancing talk to the agent u r considering refinancing with, and do u get to skip one to 2 mortgage pmts after refinancing?

Answer 8

Send in details your case and also your credit score and also the state you are in at [e-mail]
Will get back to you at the earliest ,
regards,
kish
480.751.4125