The Mortgage Porter

Clark Howard Suggests 5/1 ARMs for Refinancing

Yesterday morning on CNN, "Money Expert" Clark Howard recommended that home owners who are considering selling their home in the next five years investigate refinancing into a 5/1 adjustable rate mortgage.  Why would he suggest such a "risky" product? Interest rates for adjustable rate mortgages are extremely low right now and if you're not going to have the home for more than 5 years, you could save a significant amount of money.

I will be using worse case adjustments for this post, assuming that the index (12 months LIBOR) has climbed incredible to where the the rates have hit the lifetime caps (ceiling) of 5% at the first adjustment and have remained their at each adjustment.  The 12 months LIBOR is incredibly low right now and those who have ARMs setting at their first adjustment are probably in a good position.

These rates as of June 15, 2011 at 10:30 am based on 740 or higher credit scores and a loan to value of 80% or lower.  NOTE: We do have several programs available if for Seattle area home owners who have diminished home equity.   This scenario is based on a rate-term owner-occupied refinance and a loan amount of $327,500.

3.00% for a 5/1 ARM (fixed at 3.00% for 60 months) with a principal and interest (p&i) payment of $1,381. APR 3.285.  The "caps" that limit how much this rate can adjust are 5/2/5 so the highest this rate can ever be is 8.00% (worse case scenario) and the lowest is the margin (2.25%).

• At 61 months, assuming worse case scenario, the rate would adjust to 8.000% with a p&i of $2248 and an approx. principal balance of $291,600.
• At 85 months, assuming worse case scenario, the rate would still be 8.000% with a p&i of $2248 and an approx. principal balance of $283,228.

3.375% for a 7/1 ARM (fixed at 3.375% for 84 months) with a p&i payment of $1,448. APR 3.417.  The highest this rate could ever be with 5/2/5 caps is 8.375% at the 85th payment and the lowest is the margin of 2.25%.

• At 61 months, the rate is still 3.375% with the same payment of $1448 and the balance is approx. $293,122.
• At 85 months, assuming worse case scenario, the rate would adjust to 8.375% with a p&i of $2270 and an estimated balance of $277,650.

4.500% for a 30 year fixed rate with a principal and interest payment of $1,659 for the entire term of the mortgage.

• At 61 months, the balance is approx. $298,500.
• At 85 months, the balance is approx. $285,000.

NOTE: the above rates are from June 2011 - if you would like a mortgage rate quote based on current pricing for your Washington home, click here.

What is crucial when selecting your mortgage is considering what your financial goals are. If you're not certain that you'll be selling your home in 5 years and you do not want to risk the adjustment that will take place in 61 months,  you might want to consider the 7/1 ARM, which will "buy" you two more years of a fixed period for a slightly higher rate. If having an adjustable rate mortgage is going to keep you up worrying at nights, than a fixed product, like the 30 year or 15 year is probably a better option for you. If an adjustable rate mortgage is suitable for your financial scenario, the savings can really add up.

Personally, if you're considering an adjustable rate mortgage, I would recommend seriously considering the next longest term just to "buy" some wiggle room.  I was honestly a little surprised that Clark Howard was pushing a 5/1 ARM when the 7/1 is currently just a little higher.  Whatever choice is made, it belongs to the home owner and it is their responsibility to understand the risk, rewards and terms of what ever mortgage product they select. 

If you have questions about mortgages for homes located anywhere in Washington, please contact me.  By the way, if your mortgage originator is no longer in the business (many have found new careers with the higher standards now required), I'm happy to adopt your mortgage - no refinance or transaction is required - your mortgage does need to be on a home located in Washington.

"Live" Interest Rate Quotes and other Mortgage Miscellany for Wednesday

Typically I post mortgage rates based on a set criteria on Mondays...however sometimes holidays or the unexpected happen, like jury duty, and I'm not able to stick to my regular routine.  This gives me the opportunity to share rates quotes that I'm actually providing to people who are considering refinancing or buying a home located in Washington state.  If you like this, you may want to follow me on Twitter where I provide "live rate quotes" frequently along with other mortgage tidbits.

8:30 a.m. quoting scenarios for a rate-term refinance using adjustable rate mortgages.  The loan to value is estimated at less than 75% and we won't know for certain until the appraisal is complete.  These rates are based on a 740 or higher mid-credit scores and owner occupied home in the greater Seattle area.  Loan amount is $368,000.  The borrower's goal is to their current monthly mortgage payment and therefore, an adjustable rate mortgage may be worth considering.

3.375% for a 5/1 ARM priced with 0 points (apr 3.396).  With CAPS of 5/2/5, the highest this rate can adjust to in 60 months is 8.375% and the lowest it can adjust to is 2.25% (the margin).  Principal and interest is $1627.

3.75% for a 7/1 ARM priced with 0 points (apr 3.543).  With CAPS of 5/2/5, the highest the rate can adjust to in 84 month is 8.75% and the lowest it can adjust to is 2.25%.  Principal and interest is $1704.

4.375% for a 10/1 ARM priced with 0 points (apr 4.014).  With CAPS of 5/2/5, the highest the rate can adjust in 120 months is 9.375% and the lowest is 2.25%.  Principal and interest payment is $1837.

If the home appraises high enough to produce a loan to value of 70% or lower, it may qualify for an interest only 30 year fixed mortgage.  For that scenario, I'm quoting 5.375% priced with 0 points (apr 5.440).  Interest only payments in the amount of $1648 are allowed for the first 120 months.  Home owner can pay towards principal...after 10 years, the mortgage is amortized for 20 years at 5.375% which would provide a principal and interest payment of $2,506.

9:14 a.m. DOW at 12005 (down about 13) and MBS are slightly negative from this morning.

Q:  What is the minimum down payment allowed for a $200,000 sales price with an FHA insured loan?

A:  $7,000.  Currently FHA allows 3.5% of the sales price as a minimum down payment and the seller can pay closing costs and prepaids.  The 3.5% down payment may be gifted from a family member.

9:30 a.m. quoting 4.750% with zero points for FHA 30 year fixedrate using 3.5% down payment for a $200,000 sales price and a mid-credit score of 650 (apr 5.534).   With this scenario, there is approx. $10,800 due at closing including down payment, closing cost, reserves and prepaids so the most the seller can contribute is $3,800 since the buyer must invest a minimum of 3.5%.  Currently the maximum a seller can contribute is 6% of the sales price which is expected to be reduced anytime to 3% - as of the time of writing this post, a mortgagee letter from HUD has not been issued reducing allowed seller closing cost contributions.

NOTE: annual FHA mortgage insurance premiums are set to increase 0.25% basis points next month.

10:12 a.m. DOW up about 13 and I'm receiving an intraday rate sheet from one of the lenders I work with featuring pricing for the worse.  The good news is that since I don't work for a bank, I work with several lenders and their rates have not adjusted.  MBS haven't budged much since my last MBS update...some lenders just react quicker than others or may have started lower this morning with their initial rate sheet than what they wanted.   Bottom line, it's nice to have options as a Correspondent Lender!

11:20 quoting 4.75% for 30 year fixed FHA (apr 5.563) $150k sales price w/3.5% down payment and seller paid closing costs for home buyer in Kent.  Main goal is to have a total mortgage payment around $1,000 - $1200 per month with $6,000 available funds for down payment.

12:00 quoting 4.875% priced w/0.75 points (apr 5.017) or 5.000% with zero points (apr 5.130) for a condo in Seattle priced at $250,000 with a 20% down payment based on 740+ credit scores.   Condos have a 0.75% hit to fee if the loan term is longer than 15 years or the down payment is less than 25%.

25% down payment with the condo purchase will provide 4.875% with 0 points (apr 5.012) for 30 year fixed closing by April 29, 2011.

12:25 DOW is up about 86 and MBS (mortgage backed securities) continue to slide down from this morning.

12:40 p.m. quoting 4.750% 30 year fixed priced w/0.5pts (apr 4.867) $416k loan amount with an 80% loan to value for home buyers in Bellevue area with 780 mid-credit scores.

12:45 p.m. quoting 4.875% 30 year fixed conforming high balance priced w/0.5pts (apr 4.985) $480k loan amount with an 80% loan to value for a home buyer in Samammish with 740+credit.

1:00 p.m. DOW closes up 67.

3:00 p.m. quoting 4.625% for a 30 year fixed FHA priced w/0.5 points (apr 5.380) for a condo priced at $250,000 with 5% down payment.  The home buyer may put 20% down towards the condo however it makes no difference in interest rate nor the rate of mortgage insurance.  FHA loans have mortgage insurance for a minimum of 60 months AND the loan balance reaching 78% loan to value. 

FHA 5/1 Adjustable Rate Mortgage

FHA ARMs are extra special in my eyes.  I like that they have very low caps limiting how much they can adjust after the fixed rate period is over.  Plus, FHA loans may be assumable to a qualified borrower in the future should you decide to sell your home.  Today's fixed rates have about a 1 point difference between a 30 year and a 5/1 ARM, but with a 1% rate cap, worse case scenario, the 5/1 ARM will reach today's 30 year fixed rate at it's first adjustment and keep that adjusted rate for one year.  Let's see how this pencils out. 

NOTE: for a current rate quote for an FHA ARM or any mortgage for a home located in Washington, click here.

As of 12:45 p.m. Feb.  2, 2011, based on a credit score of 720 with a sales price of $400,000 and a down payment of 3.5%, I would quote the following:

30 year fixed FHA with zero points: 4.750% (APR 5.497).  Principal, interest and mortgage insurance payment:  $2,321.16.  ($2033.69 plus $287.08 monthly mortgage insurance).

5/1 FHA ARM with zero points: 3.750% (APR 6.521).  Principal, interest and mortgage insurance payment: $2,082.58.  ($1805.50 plus $287.08 monthly m.i.). 

Based on this pricing, the difference in monthly savings with the ARM is $238.56.  Over five years, the savings is about $14,315. 

The FHA 5/1 ARM has caps of 1/1/5.  This means that the most this rate can adjust on the first adjustment date (after 60 months) is up or down 1%.  Using the scenario above, the highest the rate can adjust to is 4.75% and the lowest is 2.75%.  The rate will continue to adjust annually no more than 1% up or down for the remainder of the term or as long as the mortgage is retained.  The highest the rate can ever be 5% higher than the note rate (this is called the "ceiling").  With this scenario, that would be 8.750%; however it would take 5 years (after the five year fixed period is over) for the rate to adjust that high. 

Here's what the principal, interest and mortgage insurance (PIMI) would look like "worst case" scenario assuming your first payment is made today and the rate only adjusts upwards:

PIMI Payments from 2/1/11 - 1/1/16 at $2,082.58 at 3.750%.  (Rate fixed for 5 years).

PIMI Payments from 2/1/16 - 1/1/17 at $2,259.96 at 4.750%.  (Maximum increase in rate of 1%).

PIMI Payments from 2/1/17 - 1/1/18 at $2,454.06 at 5.750%. 

PIMI Payments from 2/1/18 - 1/1/19 at $2,650.82 at 6.750%.

PIMI Payment from 2/1/19 - 1/1/20 at $2,849.23 at 7.750%. 

MI Payment (see NOTE below) from 2/1/2020 to 1/1/2021 at $2,818.20 at 8.750% $310,638.

The rate will continue to adjust annually (on the anniversary date of the first adjustment) and will be reamortized based on the remaining term. The rate can adjust by as little as 0.125% but never more than by 1% up or down and never higher than 5% of the Note rate.

NOTE:  FHA monthly mortgage insurance drops off after the loan balance reaches 78% of the value (based on the original value of $400,000 = $312,000) and a minimum of 60 payments have been made.  Assuming all payments are made as scheduled, the home owner will reach 78% around 108 payments (9 years) with the adjustable rate mortgage.   With the 30 year fixed rate, it will actually take closer to 120 months (10 years) to reach the 78% threshold before the monthly mortgage insurance drops from the payment.  Additional payments can be made towards principal but the earliest the mi will be removed regardless of loan to value is 60 months.

The scenarios above are assuming that we finance the upfront mortgage insurance premium of 1%.  Another option is for the 1% to not be financed and paid as a closing cost...even the seller can pay for the upfront mortgage insurance premium.  At this point, Sellers can still contribute up to 6% of the sales price towards closing costs and prepaids; they cannot pay any of the down payment.  

Although my quote was based on a 720 mid-credit score.  We're currently approving FHA loans with low mid-credit scores down to 640.

The loan limits for FHA loans in King, Pierce and Snohomish County is currently $567,500 (until October 1, 2011).   

Is an adjustable rate mortgage right for you?  It depends on your personal scenario is and if you can stomach having your rate change.  The 1/1/5 caps are certainly more tolerable than the 5/2/5 caps that most conventional ARMS tend ot have.  At any rate, it's good to know what your mortgage options are.

If you are considering buying or refinancing a home located in Washington state, I'm happy to help you!

Live Mortgage Rate Quotes

Yesterday, I was not able to post my regularly scheduled "Monday Rate" post since I was on the road taking the day off to celebrate my husband's birthday.  The evening before, I treated him to the Van Morrison concert at the Gorge in George, Washington.  If you ever have the opportunity to see Van live, he's amazing.

Back to work.

As I quote rates today for homes located within Washington state, I'll update this post.  Remember, rate quotes can be like snowflakes, each one unique as different factors, including the time it's quoted, may impact the rate.   Every day, I quote rates live via Twitter.

This afternoon (around 11:15 pst), we have the FOMC meeting may move rates.  As I prepare this post (7:30 am PST), the DOW is down 108 (off it's lows).  Stay tuned.

8:30 am: Quoting 4.875% for a 30 year fixed Freddie Mac HARP refinance with a loan amount of $247,000 subordinating a second mortgage priced with 0.25% points (apr 4.999) mid-credit score is 660-679 in the Seattle area.  Loan to values are 103% for the first mortgage and 115% including the second mortgage (estimated value of the home at $240,000).   If the home appraises higher than estimated, we may be able to improve the rate...but we won't know until we have the appraisal.

8:43 am:  DOW down 85.

9:45 am:  Quoting 3.375% for a 5/1 rate-term "cash-in" refinance based on a loan amount of $301,500 and an appraised value of $335,000 (90% loan to value).  Should the home appraise higher, we can adjust the loan amount higher to reduce the cash needed to close.  Priced with 0 points and $640 in closing costs (APR 6.446%).   5/1 LIBOR ARM: 2.25% Margin with 5/2/5 caps - highest possible rate is 8.375% at 60 months.  

10:07 am:  DOW down 92

10:17 am: Quoting a 5/1 FHA rate-term "cash-in" refinance for the same Snohomish County home owner from 9:45 am:  3.500% with 0 points with 1/1/5 CAPS (APR 4.040) and an 95% loan to value (less cash at closing).  FHA can go up to 97% loan to value with a slightly increased annual mortgage insurance rate (0.55% vs 0.50%/12).  The most the rate can adjust at 60 months is 1% and the the most the FHA rate can adjust annual on the anniversary of the adjustment date is 1% with a lifetime maximum rate of 8.5%.  If the rate adjust at the highest possible every year, after the 5 year fixed period, it would take 5 years to reach 8.5% (2011 = 4.5%; 2012 = 5.5%; 2013 = 6.5%; 2014 = 7.5%; 2015 = 8.5%).   FHA insured loans may be assumable to qualified buyers.  

NOTE:  this borrower could consider waiting until HUD begins the FHA "short refinance" program...the risk is where mortgage rates may be next month, when the program starts, and IF their mortgage servicer will reduce their principal balance by at least 10%.

10:30 am:  DOW down 114 ...results of the FOMC meeting are about 45 minutes away.

11:20 am:  FOMC Statement has been released leaving the Fed Funds rate unchanged for an "extended period" of time.  DOW was down 38 and now (11:27) down 60.

11:30 am:  preparing a rate quote for a returning client from Edgewood who would like to refinance their existing 30 year fixed mortgage and are interested in possibly reducing their term.   They have excellent credit and we're assuming they have an 80% loan to value with a base loan amount of $207,000.

30 year fixed priced with 0 points @ 4.375% (apr 4.480) with a principal and interest payment of $1033.52.  Reducing monthly mortgage payment by $200.   It will take 17 months to return to their current existing principal balance of $202k.   If these home owners perfer, they can opt to not finance the closing costs (bring cash in to close).

20 year fixed priced w/0.5 points @ 4.250% (apr 4.452) with p&i of $1,281.82.  Increasing the borrowers payment by $40 per month returning to their existing principal balance in about 9 months.

15 year fixed priced with 0 points @ 3.875% (apr 4.054) with p&i of $1,518.22 increasing the borrowers payment by $280 per month returning to their existing principal balance in 6 months.

NOTE:  I'm personally "typically" in favor of home owners opting for the lower payment/longer term...depending on how much additional income and/or assets are available.   With a 30 year fixed rate, you can always pay additional towards the principal to reduce your term and interest paid over the life of the loan.  However, if something should happen (health, employment, etc) where you do not have enough income to meet your increased payment of your shorter term mortgage (like a 15 year), you do not have the option of making a "30 year payment".  Opting for a 30 year fixed rate provides more flexibility than a 15 year. 

12:12 pm: DOW down 30

1:00 pm: Quoting 4.375% for 30 year fixed rate-term refinance $399,000 loan amount 80% loan to value condo in Seattle priced with 0 points with $3,000 in closing costs (apr 4.441) does not include prepaids/reserves.  P&I = $1,992.15.  

Same scenario with a 20 year mortgage provides a rate of 4.250% (apr 4.339) with a principal and interest payment of $2,470.75.

NOTE: condo's have a price hit of 0.75% with loan to values over 75% and terms amortized over 15 years with conventional mortgages.  

DOW closes down 52.

2:40 pm: Quoting 4.375% priced with 0 points for a rate-term conforming high-balance refinance $504,000 loan amount for a West Seattle home appraising for $750,000 or higher (apr 4.427).  My returning client will save $200 per month and break even on the closing cost in 16 months.

Next Monday...I should be back to my regular scheduled rate post!   For your personal rate quote for a home located in Washington, please contact me!

Are Adjustable Rate Mortgages Worth Your Consideration?

Recently I talked with a Seattle home owner who's considering refinancing their 30 year fixed rate mortgage for an adjustable rate mortgage.  Adjustable rate mortgages (ARMs) have fallen out of favor in recent years due to the mortgage melt-down.   I've never been a fan of option ARMs, however there is nothing wrong with adjustable rate mortgages as long as the borrower understands the terms and it's suitable for that person's financial scenario.   This home owner's financial plan is to be mortgage free in seven to ten years after his children are out of college.   Cash flow is important right now so he would rather not do a 10 or 15 year amortized mortgage.

You very well could be scratching your head right now thinking "with how low fixed rates are right now, why on earth would anyone consider an ARM?" 

With his scenario, we're looking at a loan amount of $400,000 and a loan to value of 60% with excellent credit (scores are above 740).   I priced the following scenarios with zero points (origination or discount).   These rates are effective as of 5:00 p.m. December 15, 2010.

4.875% for a 30 year fixed (APR 5.020).  Principal and interest payment (P&I) = $2,117.   With this scenario, your principal and interest payment is never scheduled to change.

4.375% for a 10/1 ARM 12 month LIBOR with 5/2/5 CAPS 2.25 Margin (APR 5.731). P&I = $1997.    With this scenario, after 120 payments (10 years) the rate will adjust based on adding the 1 year (12 month) LIBOR is plus the 2.25 margin limited by the first "cap" of 5%.  The rate in 120 months cannot be higher than 9.375% nor lower than 2.25% (the margin also acts as "the floor" limiting how low the rate can adjust).  After the first adjustment, the rate will adjust once a year on that anniversary of the first adjustment limited by 2% up or down.  The highest the rate can be on this scenario during the lifetime of this loan is 9.375%. 

3.625% for a 7/1 ARM 12 month LIBOR with 5/2/5 CAPS 2.25 Margin (APR 5.742).  P&I = $1824.  With this scenario, after 84 payments (7 years) the rate will adjust based on adding the 1 year (12 month) LIBOR p the 2.25 margin limited by the first "cap" of 5%.  After 84 payments/months, the rate cannot go higher than 8.625% or lower than 2.25% (the margin/floor).  After the first adjustment the most the rate can adjust annually is 2% up or down following 12 the anniversary of the first adjustment (at 96 months) and annually thereafter.  For example, worse case at the second adjustment (96 months) the rate could be 10.625% (3.625% plus 5% at 7 years and plus an additional 2% at 8 years).

Selecting a 30 year fixed mortgage provides security of a fixed and options with your mortgage payment.  The home owner can pay additonal towards principal to pay down the mortgage.  A 15 year fixed mortgage is also more "safe" than an adjustable if you're concerned about retaining the mortgage beyond the ARM's fixed period.  However there is no flexibility with the payment (you can make a 15 year payment on a 30 year mortgage; you cannot make the 30 year payment on the 15). I'll admit I'm biased towards the 30 year fixed mortgage, however Americans currently still has a choice as to what mortgage options they prefer unless Congress changes this (as I'm afraid they'd like to).

Adjustable Rate Mortgages will reamortize based on the remaining term at their adjustment points.  For example, after 120 payments with a 10/1 ARM, the payment will be based on the new rate and a 20 year amortization.  With a 7/1 ARM, the payment will be based on the new rate and a 23 year amortization (7 years minus 30 years).

My client is actually considering an ARM because of the amount saved in monthly payments over the term he plans on retaining his mortgage.  

Let's compare the ARMs and 30 year fixed scenarios at 84 months...of course, there is no way for us to know what the LIBOR rate will be 7 years from now to predict an 100% accurate rate.

30 Year Fixed Rate at 7 Years.  Principal Balance = $350,879.  P&I=$2,117.  No change.

7/1 ARM at 7 Years.  Principal Balance = $341,250 providing a principal savings of $9,629 over the 30 year fixed rate.  The difference in payment between the 30 year and 7/1 ARM over this time period is $24,612 (2117 - 1824 = 293 per month.  293 x 84 = 24,612.  However...the payment is set to adjust.  Worse case scenario, the rate could go up to 8.625%.  Amoritzing $341,250 at 8.625% for 23 years provides a principal and interest payment of $2,156 - worse case scenario, this is only $39 more a month than what the 30 year fixed scenario has been paying the full 7 years.  

10/1 ARM at 10 Years has a principal balance remaining of $347,156.   The payment is $120 less per month than the 30 year fixed providing a monthly payment savings of $10,080.  And the 10/1 ARM will continue to have a fixed payment 3 years beyond the 7/1 ARM; at 7 years, the rate for the 10 year ARM is still 4.375% with the same principal and interest payment of $1997 where the 7/1 ARM payment at 85 months is unknown.

Bottom line, it's important to review your options and to consider your personal life plans.   A 30 year fixed rate mortgage if you're not planning on retaining that financing or home more than 10 years may be costly--however if you cannot stomach the thought of your rate ever adjusting, the 30 year fixed rate may be your cup of tea.  It is (and should remain) the homeowner's choice.

Pricing a Home Affordable Refinance

Home Affordable Refinances allow home owners with conventional mortgages (Fannie Mae or Freddie Mac) who have had their homes depreciate refinance at competitive market rates.  

Factors that impact the mortgage interest rate are:

• loan to value (new loan amount divided by the appraised value)
• the lowest middle credit score of all borrowers on the loan
• lock period and loan loan amount

A Seattle couple who purchased their home in 2005 for $400,000 with a 20% down payment with an interest only mortgage still has a loan balance of $320,000 if they have not made any additional payments towards principal.  This couple has excellent credit and is interested in refinancing but the big mystery is how much the home will appraise for since it's based on what other homes similar to theirs have recently sold and closed for.  

They currently make their mortgage payments to Chase and their mortgage is securitized by Freddie Mac, which means they probably qualify for the Freddie's Home Affordable Refinance Program:  Relief Refinance Mortgage.  With this mortgage, the loan amount is limited to current balance plus $5,000.   In order to limit the amount of cash possibly due at closing, I often price the rate at zero points to reduce closing costs.

Here's what current rates would look like based on different appraised values using a 30 year fixed rate priced with zero points (origination or discount):

Loan to value of up to 95%:  4.500% with 0 points (apr 4.571%).  This would be the same rate if the home has a loan to value of 80% (roughly $410,000).   Based on the Seattle couple's scenario, their home would need to appraise for $340,000 or more to qualify for this rate.

Loan to value over 95% and up to 97%:  4.625% with 0 points (apr 4.697%).  The home would need to appraise for around $335,000.

Loan to value over 97% and up to 105%:  4.750% with 0 points (apr 4.823%).  The home would need to appraise for at least $310,000.

Unless it seems real obvious to me what the homes appraised value may be, I tend to lock based on the worse case "possible scenario".  Once we receive the appraisal, we can adjust the rate accordingly.   If the appraisal comes in lower than the worse case "possible scenario", the home owner does have options, including bringing in cash to closing or terminating the refinance at the cost of the appraisal deposit.

Fannie Mae and Freddie Mac's Home Affordable Refinance program is helping many Washington state homeowners reduce their mortgage payments or convert their adjustable rate or interest only mortgage into a fully amortized mortgage.   This program is available for owner occupied, vacation homes and rental/investment property. 

Do ARMs Give You Goose Bumps?

Adjustable rate mortgages are becoming attractive once again for those who do not plan on retaining their mortgage beyond the fixed period or who can stomach the unknown of what exactly their rate may be once the fixed period is over.

Today I quoted the following rates for a home buyer in Seattle with a 740+ mid-credit score who is buying a home with just over 20% down payment to have a loan amount at $417,000. 

30 Year Fixed:  5.125% with 1 point (APR 5.281%) Principal and interest payment of $2,270.51.

10/1 ARM:  4.625% with 1 point (APR 5.883%).  Principal and interest payment of $2,143.96. 

5/1 ARM: 4.125% with 1 point (APR 6.480%) Principal and interest payment of $2,020.99.

Let me begin by saying there is nothing wrong with a 30 year fixed rate in the low 5s.  In fact, historically speaking, it's a great rate.   What I'm most excited about is the return of the 10/1 ARM.   The 10/1 ARM offers a long term at a lower rate.  Based on this scenario, the monthly savings is $122.97.  Over a five year term, if you put that savings into a mattress; this is a savings of $7,378.20.  Use this amount to pay off non-tax preferred debt or to apply towards reducing the principal balance and it's even more beneficial.

Do factor how long you're planning on staying in your home and/or retaining the mortgage.  Remember that "life happens" and should you opt for a shorter period ARM, such as the 5/1 ARM, with intentions of moving--you may find yourself dealing with an adjustment that you were not planning on.   It's all about knowing what your options are, understanding your choices and the terms of the mortgage and making an informed decision.

 

Reviewing an ARM Note for a Neighbor in West Seattle

I've been working with a home owner in West Seattle who has an adjustable rate mortgage that she obtained almost five years ago from a big "local" bank.   She contacted me to obtain rate quotes for refinance because her ARM is set to adjust soon.   Here's what a review of her Note reveals:

The Note rate is 4.125% for five years with the first adjustment coming up on May 1, 2009.   The index is based on the 1 Year Treasury (CMT) and her margin is 2.75%. 

If her ARM were set to adjust today, her new rate would be based on adding the margin of 2.75% to the 1 Year Treasury rate of 0.49% rounded to the nearest 0.125% = 3.25%.  (Indices are changing dramatically in our current climate--it's hard to say where the CMT will be on May 2009).

This rate is amortized based on the remaining term of 25 years and every May her ARM will continue to adjust based on where the current index is (1 year Treasury - CMT) plus the margin of 2.75%.   This is also limited to specific caps that her Note features of 2% annually and a lifetime ceiling of 10.125%. 

Let's assume her rate adjust to 3.25% in May 2009.  The highest her rate could be on May 2010 is 5.25% and the lowest is 2.75% (the lowest the rate may ever be is limited to the margin of 2.75%).  If rates continuing rising, the worse case scenario would look like this:  May 2011 = 7.25%; May 2012 = 9.25%; May 2013 = 10.125% (because of the lifetime cap of 10.125%).

If worse case scenario, the CMT climbs dramatically over the next few months, the highest her rate could be is 6.125% based on her 2% rate caps.

Should this home owner refinance with her adjustment date looming near?  It really depends on what her personal financial plans are and if she can tolerate having her rate change annually.  Her main risk is where rates may be in the future.   The choice is hers.

What would you do?

Are you a Seattle area home owner with an ARM?  I'm happy to review your Note for you--no refinance required.

 

Gimme Five! Comparing Today's 5 Year ARM to a 30 Year Fixed

There is currently about a 0.75% difference in rate between the conforming 30 year fixed and 5/1 ARM and 0.625% in rate with conforming-jumbo loans.  Is that enough for you to opt for an adjustable rate mortgage?

Beyond the obvious question: "how long do you plan on retaining the mortgage or staying in your home?"   Here are some other stats to consider based on rates I quoted Friday morning using a purchase of $500,000 with a loan amount of $400,000.   The closing costs on both loans are identical.

30 year fixed at 5.75% (APR 5.902%) has a principal and interest payment of $2,334.

5/1 ARM at 5.000% (APR 6.759%) has a principal and interest payment of $2,147.  This is a monthly savings of $187.

The 5/1 ARM is fixed for 60 months and will then the rate is re-calculated.   The 5/1 used in this scenario is a 5/1 LIBOR with a margin of 2.25% and caps of 5/2/5.   For now, lets review your savings over the 60 month period.

The 5/1 ARM will save $11,220 over the 30 year in five years in payment alone. 

30 year fixed at 5 years has paid $28,951 towards principal and has an estimated balance of $371,049.   $111,106 has been paid towards interest (no benefit towards your prinicpal, however it may be a tax benefit).

5/1 ARM at 60 months has paid $32,663 towards principal and has an estimated remaining balance of $367,337.   $96,228 has been paid towards interest.

Over a five year period, the net (interest) savings of the 5/1 ARM over the 30 year fixed assuming you do not make any additional payments towards principal is $14,878.

So what happens if someone decides to select a 5/1 ARM and 60 months later, they're keeping the home?  They can refinance or not based on what the current market and what their finacial plans are.  The monthly savings over 60 months is plenty to cover the typical cost of a refinance ($2000-$2500) assuming rates are not favorable enough to opt for a "no cost refi".

If you decide to retain the mortgage, you will add the margin of 2.25% to the current 1 Year LIBOR rate when your mortgage is adusting.  (As of today, the 1 Year LIBOR is around 3.067%).   Your mortgage is reamortized based on the remaining term (25 years at the first adjustment).   The caps with this particular ARM are 5/2/5 meaning that the highest your rate can adjust is to a steep 10% and the lowest your rate will be at the first adjustment is 2.25%.   That's a huge range and whatever your rate will be depends entirely on LIBOR.   Some 5 year ARMS offer caps of 2/2/6 which would limit the first adjustment to 2%--the initial rate is typically slightly higher.   Do learn exactly what your cap, margin and index are before you accept any adjustable rate mortgage.

I suggest considering the following:

What is your risk tolerance?  Will having a mortgage with the potential to adjust in 5 years give you a rash or cause you to lose sleep at night? 

How long do you plan on staying in the home or retaining the mortgage?  If you have a tendancy to refinance when rates improve or if this is a home (such as a starter home) where you may not keep it for 5 years, you may want to consider the ARM. 

Picture your life and where you and your family may be five years from now.   Is your income stable or growing?  Do you have retirement in your sights?

How disiplined are you?  $187 per month could make an impact on paying off non-tax preferred debt, paying down principal or building your savings.  Pay yourself the $187 per month in an interest bearing account at 3% and you'll have $12,000 more in 60 months in addition to the other savings.

Regardless of what program you select for your mortgage...the choice is yours and it is your responsibility to learn as much as you can about the program--ask questions! 

Do you have an existing mortgage you're unsure of?  Has your loan originator left the mortgage industry?  I'm happy to help Washington State home owners with their mortgage needs--including reviewing your existing financing, such as ARMS.  My mortgage adoption program does not require any refinancing or new mortgage.

I Love Checking Out ARMs: Reviewing An Existing Mortgage

Recently a friend approached me confessing to having one of those "awful adjustable mortgages"...she thinks she needs to refinance and take advantage of today's lower rates.   Before assuming that someone "needs" to refinance, I like to review their current mortgage and what their financial goals are.  Sometimes, people do not need to refinance...they just need to understand their mortgage terms.

Current Mortgage:  P&I Payment $3,330 (original balance $520,000).

• 7/1 Adjustable Rate Mortgage: Note Rate 6.625%
• Caps: 2/2/5
• Margin: 2.25
• Index: 1 Year LIBOR (currently 2.637% as of this the date of this post).

There is approx. 65 months remaining with the fixed period rate of 6.625% before the mortgage adjusts.   When the mortgage adjusts, the new rate will be 2.25% plus the current 1 year LIBOR rate EXCEPT the rate will be no lower than 4.625% and no higher than 8.625% due to the 2% adjustment cap. 

Best case scenario at first adjustment date with current mortgage:

Rate: 4.625% with principal and interest payments for 12 months of $2,780.   Note: If the mortgage was adjusting today, the rate would be closer to the best case scenario at 4.875% (2.25% plus 2.637% = 4.887% rounded to the nearest 0.125%).  Alas...they have 65 more months before knowing what the going rate for the 1 Year LIBOR will be.

Worse case scenario at first adjustment date with current mortgage:

Rate:  8.625% with principal and interest payments for 12 months of $3,937.

Possible scenarios that I suggested:

Refinancing into a conforming-jumbo mortgage 30 year fixed at 6.375%.  This would provide a principal and interest payment of $3,232.   With closing costs at $2900, they will break even on this scenario in 30 months.  From 30 months (the break even point) to when the fixed period of the ARM is over, the savings based on the monthly payment would be $3430.

Restructuring the existing mortgage into two mortgages with a conforming first at $417,000 at 5.875% and second mortgage paying off the balance (they can opt for a fixed second or a HELOC).   With a principal and interest payments of $3,194 and closing costs of $3,200; it will take 24 months to break even on this scenario.   From 24 months to when the fixed period of the ARM is over, the savings based on the difference between the monthly payments would be $5,576. 

This chart, which I created utilizing The Mortgage Coach, is factoring in the 2.25% margin to the LIBOR rate back to January 1999.  You can see there is a significant range with the rate.   Home owners with ARMs based on the LIBOR rate from 2002 to 2004 were probably grinning from ear to ear (depending on what their margin was) when you see what their rate was compared to the 30 year fixed.  Timing is everything with an adjustable rate mortgage.

What ever the home owner decides to do is completely up to them.  Of course one of their options is to not refinance and wait to see what the new rate (LIBOR) will be in 65 months.   If they wound up with a "best case scenario" new payment, it would be pretty sweet however the cost of paying the higher payment for 65 month and we don't know what the index will be at the date of adjustment.    Understanding your mortgage and knowing your available options just starts with contacting your local Mortgage Professional. 

By the way, if you are a Washington State  home owner who has not heard from your loan originator lately or if you would like me to adopt your mortgage, please contact me.   Many LO's have left the industry or do not provide service once the loan has closed.  I'm happy to review your ARM (or fixed rate mortgage) without any obligation to refinance.