thecapetownpropertygroup

The mortgage rates dropped once again. I'm refinancing my home loan again. It's incredible it hasn't been even a year considering that I did it last time.

The rates were low last year because of the anticipation for QE2. Once QE2 began, rates went up. Now rates are low once again. Why? I do not know. Maybe the marketplace is anticipating a QE3.

This time, instead of following my typical Stepping Down the Ladder script, I'm re-financing my mortgage to an ARM with a money out. Before you call me insane for choosing an ARM when rates are lower than ever, bear with me and check out to the end.

Stepping Down the Ladder

Stepping Down the Ladder suggests re-financing to a fixed rate a little above the marketplace rate, with enough credit from the lending institution to cover the closing cost. Rinse and duplicate whenever the rates go lower again.

It's a no-lose proposition. You start gaining from the lower rate on the first day. As the rates go lower, you keep locking in to a lower rate, and never ever pay any closing costs. Repeat this procedure up until the rates reach the bottom. Because the rate is repaired, your rate will remain at the bottom.

10-Year and 15-Year Fixed Rate Mortgages

When I looked at refinancing this time, I began with the very same approach. Because I have a 15-year set rate home mortgage now, I took a look at 15-year repaired and 10-year fixed choices.

If I choose another 15-year fixed, the finest rate I can get is 3.625% without any closing cost. It's barely beneficial since my present rate is 3.75%. If I opt for a 10-year fixed, I can get 3.25% without any closing cost.

Between these two alternatives, I would choose the 10-year repaired. I've had a 15-year set home loan for a few years now. I want to pay it off in 10 years.

5-Year Adjustable Rate Mortgage (ARM)

I usually do not look at ARMs at all, due to the fact that the entire idea of Stepping Down the Ladder is about locking in the lowest rate for the life of the loan. But since I was thinking about a 10-year fixed, I also took a look at ARMs.

A 5/1 ARM has a fixed rate for the first five years. The rate begins adjusting each year after 5 years. If I'm going to settle in ten years, by the sixth year the remaining balance will be small enough that I can settle if I wish to. If I don't like the rate at that time, I will just pay it off. Meanwhile I will have conserved a fair bit of interest in the first 5 years.

If I choose a 5/1 ARM, I can get 2.75% without any closing cost.

Squander Refi

A cash-out refi suggests borrowing more than the current loan balance. Usually you will pay a higher rate and/or greater fees if you refinance with a cash-out. However, if your loan-to-value ratio (LTV) is low enough, there is a ceiling you can go to without sustaining a charge for cash-out.

Why take cash out? Because the lender credit is related to the loan amount. Within particular limits, the higher the loan amount, the higher the loan provider credit. When the lending institution credit is high enough, it will have the ability to bump the rate down a notch and still make it a no closing expense loan.

For example, suppose the loan provider credit for a $100k loan is $1,000 at 2.625% and the overall closing expense is $2,000. It means the net closing cost is $1,000 for the 2.625% rate. To make it no charge you will have to go to 2.75%. However, if you increase the loan total up to $200k, the lender credit will be $2,000, enough to cover the closing expense. Then the $200k loan will be no cost at 2.625%.

If I increase the loan total up to the optimum enabled, I can get a 5/1 ARM at 2.625% with a net $900 paid to me at closing in addition to the cash-out. I grabbed this offer.

I'm using the exact same loan provider I used last time: First Internet Bank of Indiana ("FirstIB"). For the loan I desire, FirstIB offers the very best deal among a list of lending institutions I looked at: PenFed, National Mortgage Alliance, and AmeriSave.

Won't borrowing more increase the overall interest paid? Yes, if you just pay the minimum. Because the loan has no prepayment penalty, you can pay the cash-out right back in the first month. The only impact of a higher loan quantity will be a greater needed month-to-month payment amount. Since I'm going to follow a 10-year benefit schedule and the 5/1 ARM utilizes 30-year amortization, the higher required regular monthly payment is still lower than what I'm going to pay anyhow.

For instance, to settle $100k in 10 years at 3.25%, I will have to pay $977 each month. The required monthly payment on a $200k 5/1 ARM at 2.625% with a 30-year amortization is $803. If I obtain $200k, pay back $100k instantly and keep paying $977 a month, the staying $100k will still be paid off in ten years.

Borrow More to Invest?

I thought of keeping the cash-out and investing it. After all, it's tough to see how I can't make more than 2.625% a year from my investments. A five-year CD from Melrose Cooperative credit union pays 2.90% a year. If I only pay the needed minimum month-to-month payment and put the cash-out and the additional principal payments in a CD, as long as the CD rate is greater, I will come out ahead. The tax on the CD interest and the tax deduction on the home mortgage interest will be a wash.

If I put the money in a globally varied portfolio of stocks and bonds, the return needs to be higher - if I don't believe that I need to simply liquidate whatever, pay off my mortgage, and put the rest all in CDs. Everybody who is bring a home loan and investing at the exact same time is wagering the financial investments will earn more, otherwise they would not invest before the loan is paid off.

But expected returns are simply that - expected. You can bet and anticipate all you want. The real returns might come higher or lower than your expectation.

Although the idea of generating income with other individuals's cash is appealing, I'm not yet that comfy with it. I might still do the CD however that has to do with it. I do not wish to take more danger with this money.

Rates Have Nowhere to Go But Up?

You may think rates have nowhere to go however up which it's shortsighted to get an ARM now when rates are the lowest. You may think five years from now rate of interest will be much greater.

I believed the very same whenever I refinanced in the last 10 years however rates keep boiling down, reaching one historical low after another. I honestly thought it was the last opportunity to re-finance in March 2010. That was two refinances ago.

The marketplace has actually defied all predictions of greater rates. I will stop saying this will be my last . It will not amaze me if rates go in either case: significantly greater or substantially lower. If rates decrease again, I will refinance again with an ARM and extend my 5-year fixed rate duration.

When you are within ten years to settling your mortgage, re-financing to an ARM can conserve you money compared to a 10-year fixed rate mortgage. The rate is lower. So are the closing expenses (for instance PenFed charges a 1% origination cost on all repaired rate home loans, but not on ARMs).

Taking a money out and paying it right back will lower the closing expenses. You may even earn money for doing the re-finance. If you are going to settle in ten years anyhow, it's complimentary money.

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Comments

1. Money Beagle states

June 13, 2011 at 5:50 am

I would re-finance in a heart beat if it were possible, however the equity in our house is well listed below what the banks would think about in providing us a PMI-free loan w/o escrow (which is what we have today due to the fact that we put 20% down at the time). If I were able to re-finance I would absolutely think about an ARM. Even if rates were higher a couple of years down the road, the quantity of concept I 'd be able to pay for in the mean time would most likely well offset any possible uptick down the roadway.

2. David states

June 13, 2011 at 7:39 am

Very intriguing analysis. Did you consider the PenFed 5/5 ARM? If so I'm curious about your thoughts on that. I've looked at that over the last couple of years whenever there was a dip in rates but I constantly ended up opting for the "more secure" fixed rate loan.

3. Harry Sit says

June 13, 2011 at 9:27 am

@David - Yes I considered PenFed's 5/5 ARM. It's presently 3.25% for the very first 5 years, versus 2.625% on the 5/1 ARM from FirstIB. If I'm going to pay 3.25%, I might as well get the 10-year fixed at 3.25% from FirstIB without any closing expense. For my loan, the PenFed 5/5 ARM isn't as great as the deals from FirstIB.

4. Mike states

June 13, 2011 at 10:46 am

Interesting technique. What is the max. LTV ratio you can squander without being punished?

5. Harry Sit says

June 13, 2011 at 10:47 am

@Mike - 60%.

6. TJ states

June 13, 2011 at 6:00 pm

Has teh no closing cost ended? I do not seem to see that alternative ...

7. Harry Sit says

June 13, 2011 at 8:30 pm

@TJ - FirstIB just lists rates with closing expense. The next greater rate will have no closing cost. For instance if the highest rate (most affordable fees) noted is 3.5%, 3.625% will have no closing cost.

8. enonymous says

June 14, 2011 at 11:08 am

excellent analysis

of course 60% LTV, and little enough balance to be able to reward the loan with a balloon payment at the end of the 5 years is the crucial

the Penfed 5/5 is a remarkable deal at 3.25% (if that is stll there) specifically for those with jumbo home mortgages. however it is not a lot for those in TFBs exact circumstance ...

I remain in a 15 yr fixed, doing the refi thing yet once again (always no closing costs), and the 5/5 or 5/1 and even 7/1 ARMs didn't make sense to me, mostly because I'm unwilling to to make the big balloon payment needed to be safe with a 5/1 or 7/1, and since the 3.25 5/5 ARM isn't low enough to lure me from my 3.75% 15 year fixed ...

9. ChrisCD says

June 17, 2011 at 7:59 am

Forgive me, however I am unclear how the no-closing expenses deal works. Whenever I have actually looked they have wanted to wrap the expenses into the loan which isn't what I am aiming to do.

In addition, our home value has actually dropped low enough to make it the choice seem out of reach.

cd:O)

10. Heidi states

June 18, 2011 at 4:54 pm

Money Beagle - I remained in a comparable situation. After calling several banks (due to the fact that their website calculators regularly concluded that I would not certify for their mortgage due to my LTV), I discovered Connexus Cooperative credit union. They let me do an 80/20 to prevent PMI simply last December and I saved over a $1,000 a month on my very jumbo mortgage. I have considering that paid off the HELOC and am paying off the 25 year 3/3 ARM over a 10 year amortization. You might wish to try offering them a call.

11. Madison states

June 22, 2011 at 6:38 am

I keep lowering our 5/5 ARM at penfed with a strategy to pay off in 5-10 years. And much like you, I thought each time it could not go lower. We're at 3.375% on our 5/5, and now obviously, I see rates are even lower again!

I'll have to have a look at FirstIB, I hadn't checked out their ARMs recently.

12. TJ says

June 23, 2011 at 9:26 pm

@TFB - I see an alternative with no points, but this option still has $2k in charges (origination charge, appraisal, credit report, flood cert, title insurance, federal government recording charges)

13. Harry Sit says

June 23, 2011 at 10:59 pm

@TJ - If you desire the no cost choice, include 0.125% to the greatest rate listed. You need to call them.

14. TJ states

August 7, 2011 at 4:08 pm

@TFB do you have any experience with boxhomeloans. com?

I got much better rates for a 30 year than any other sites. I locked it however because it was "after hours" (the weekend), they can't validate until Monday, if it is lower than what i locked, my own will be the lower rate, if rates go on monday, they will disregard my request and I have to resubmit a lock request.

15. Harry Sit says

August 7, 2011 at 6:16 pm

@TJ - Sorry, I don't have any experience with Box Home Loans. Maybe examine the FatWallet thread?

16. incredibly expense states

February 19, 2012 at 7:27 pm

First IB looks appealing for a 5/1 ARM. However, I reside in Maryland and it appears that they do not lend here. Do you know if this holds true and if so, could you advise other institutions? I am seriously considering the PenFed 5/5 at 3.125% without any closing ... Thanks for a fantastic site.

17. Harry Sit states

February 19, 2012 at 8:12 pm

@super costs - Several other readers also reported the same thing. You can always call their 800 number to verify if it's still the case. If so, go with PenFed then. Maryland has a transfer tax. It'll be really tough to beat the PenFed rate when you consist of the transfer tax, which PenFed states it covers.

"5/5 Adjustable Rate Mortgage (ARM) Promotion: We will pay closing expenses approximately $10,000 per loan, to consist of: Appraisal charge, Tax Service charge, CLO Access Fee, Title Fees, Transfer Tax Fees, Credit Report Fee, Flood Cert Fee, Recording Fee, Survey if needed and Work Verification Fee."

18. super costs says

March 12, 2012 at 10:55 am

TFB - simply wished to act on my publishing. I appled for the PenFed 5/5, which seemed excellent, but their appraisal can be found in way low - about 120k under what our last appraisal was one year ago. Therefore, our loan amount surpasses their limitation given the evaluation. I am attempting to appeal but in the meantime, wished to see if you or others had other tips for a 5/1ARM or interest just product without any closing costs? (BTW, I consulted FirstIB, and they do not lend to MD) Thanks again.

19. Harry Sit states

March 12, 2012 at 12:55 pm

@super expense - Too bad the PenFed appraisal can be found in low. I hope you will have the ability to effectively appeal it. Maybe they can request another one? The other 2 loan providers on my list to inspect are NMA (nmaloans.com) and AmeriSave (amerisave.com). Also inspect the [long] FatWallet thread.

Reply

20. Jc states

July 6, 2012 at 8:52 am

If my lyv is 50% and I refi from a 30 to a 15yr fix, and squander 50,000 and then pay back the 50,000 towards the principal, it seems i will be conserving a substantial amount of interest every month. Exists a draw back to this besides a greater regular monthly payment?