Should I refinance my interest only mortgage loan?

Question

We have a 5/1 ARM with interest only mortgage currently. Got it at 5.25% 3 yrs ago. We have been making interst only payments so far with no payments towards the principal. But our home price has gone up by above 50k over the same period which I guess would count as equity. I expect my income to increase in the next few years substantially but as we get closer to the 5 yr mark, I am getting very nervous that our payments are going to get sky high and was looking at a 30 yr fixed rate loan at abt 5.8%. We plan to stay in this house for atleast another 3-4 yrs. Do you think it is wise to refinance at this point?

Answer 1

Honestly, no I don't. You have two years of security left at a rate that is currently pretty hard to find. If you are planning on being in your home only 3-4 more years, then find out what your adjustment cap is. All 5-year ARM's have an adjustment cap that limits what the loan can adjust to initially, and depending on what that is, you may find it in your best interest to ride it out until you decide to sell. You have to consider the cost to refinance versus the monthly savings you'll get by refinancing. So, let's say that you decide to stay in the home for three years. You're rate is fixed for the next two years, and depending on it's adjustment cap, let's say two percent, your rate would be fixed for the third year at 7.25%. Depending on the size of your loan amount, your payment may only increase by $100 a month. Let's say the cost to refinance is $2000, it would then take you 20 months to break even on your costs, and if you were only in the home for 12 more months it would not make sense to refinance.

If you would like further details, or if you would like me to take a look at it, email me directly, I would be more than happy to. Hope this helps.

Answer 2

Well, there are a couple things to consider. First, you should determine what your MARGIN (a % determined in advance by your lender) and INDEX (a financial index measuring interest rates, such as LIBOR) are for your current mortgage. This should be located on your monthly statement or closing statement.

The margin + the index determines what your mortgage rate is. However, be aware that a great many adjustable mortgages are discounted for the INITIAL fixed period i.e. 5 years in your case. This means that your rate can rise significantly even if the market interest rates do not change. So, try adding the margin plus the index. This % is what your mortgage rate would be if it were to adjust today.

Second, how long is the interest only payment option available? Five years? Longer? If it does not last any longer than the initial fixed rate, your payment will obviously jump up.

Consider the above and decide what is the most important: a stable payment, but paying some closing costs OR the chance of a high payment, but a lower mortgage balance? Also, be aware that you can arrange for a mortgage with very low closing costs, but a slightly higher rate - this is often beneficial for those who plan on selling in the relatively near future.

I have a very detailed article on adjustable mortgage margins, caps, indexes, etc. on my website (and no, it is not an "application" or sales site): http://www.mortgagemystery.com/

Hope this was helpful, you can contact me with questions.

Answer 3

In my opinion I would say yes. I am a loan officer and I amazed at how many people never pay their houses off. I think people now tend to think of the monthly mortgage payment a way of life for life. I suppose I am too honest because most loan officers want return refinances every couple of years, but I think it is well worth your time to look into refinancing and getting your home paid at a long term fixed rate. Imagine owning a home free and clear with no payments! So what I would do is shop around now while the rates are still pretty low. You should be able to find something decent still. It just seems (and please take no offense to this as I am being honest) paying interest only on a house makes no sense and your just making your lender rich while you get NOTHING in return. Think about it. Any how that's my advice as unpopular as it might turn out to be!

STUART

p.s.- Depending on your loan and rarely will loan officers tell you these things. Your minimum payment may be less than your interest causing the rest to accumulate on your principal owed. Just depends on the loan you received.

Answer 4

Always worth a look. Get a free quote from these guys ( the banner at the top ). It's a big name company that's helped lots of people. I'd give their link here but that's advertising for them. They helped my wife and I a few years back when we purchased our current home. It never hurts to look around for a better rate. Good luck!

http://loan.divinfo.com/

Answer 5

I've been browsing online more than two hours today looking for answers to the same question, but I haven't found a more interesting debate like this. it is pretty worth enough for me.

Answer 6

In long island you ought to have fairness to refinance. in case you do not have faith the broking service, bypass to somebody else. you may bypass everywhere you like on your loan. it is fairly useful to look for a financial employer that holds the loan particularly than merchandising it.

Answer 7

The points & costs you will pay are more important than the rate if you are looking short term. You may be better off waiting. Contact me to discuss in detail.

Web: http://www.SLarson.com/contact
Email: [e-mail]

Answer 8

How much is it going to cost you to refinance? Rates re still low, but you may be able to hold out.

Answer 9

Sorry I don't know about this

Answer 10

Thanks for all the answers