Should I refinance now or later?

[CountryBoy19]

Ok here is the situation:

I'm currently 2 years into a 30 yr mortgage at 5.75% fixed. Not the best rate, but it was a USDA loan that didn't require a down payment. That allowed me to buy a house sooner rather than wait until I had the down payment saved back.

Principal owed currently $170,000
Appraisal at time of purchase was $175,000 but I think they just gave it a conservative number because that was sufficient to satisfy the lender on the mortgage. The assessed value is $236,500.

My situation:

I anticipate a large income (more than double what I'm making right now) in the next year, with the high likelihood that I can continue that high income for at least another 3-4 years. That is not guaranteed, however. If something happens to me and I can't work that income opportunity will go away.

My wife and I live on a "healthy" income but it's not "wealthy" by any means.

My thoughts are to refinance to a 5/1 or 7/1 arm. I know arms are typically frowned upon. But with our currently expected income situation, with a 5/1 or 7/1 arm we can totally pay off the mortgage in less than 3 years. That would be before the rate even had a chance to change. I've been doing a bit of shopping around and you can get 5/1 or 7/1 arms down under 3% now. It seems like a no-brainer deal to me to refi to a low rate arm and pay off the mortgage before the rate even has a chance to change. Worst case scenario, if something does happen, our income can still comfortably pay the normal mortgage payment without causing too many ripples in our personal life (that even includes a healthy cushion if we can get it paid before the rate adjustment and the rate takes a drastic jump).

What does the hive think? If I refi right now I have to be able to finalize and close it within 1 month and absolutely NO LATER than that. If I don't refi now, I will have to wait 6 months before I can refi.

Advice? Suggestions?

 

[Titanium Man]

Keep it simple. Others will give their opinion. I hope.

Get the best "fixed" rate, and pay one extra payment a year on your principle.

There's nothing magic about it. Keep knocking at the principle, so your payoff time is reduced.

JMHO

 

[cordex]

Plug your numbers into a calculator before you run out and refinance.

The amount of money you'd save over three measly years by refinancing now probably wouldn't even justify the expense of the refi itself.

If you're going to be making enough money to pay off the home in 3 years, my suggestion is to keep the loan you have without conducting any refi at all. The interest payments will fall off very quickly with major principal decline anyhow.

 

[88GT]

Ok here is the situation:

I'm currently 2 years into a 30 yr mortgage at 5.75% fixed. Not the best rate, but it was a USDA loan that didn't require a down payment. That allowed me to buy a house sooner rather than wait until I had the down payment saved back.

Principal owed currently $170,000
Appraisal at time of purchase was $175,000 but I think they just gave it a conservative number because that was sufficient to satisfy the lender on the mortgage. The assessed value is $236,500.

My situation:

I anticipate a large income (more than double what I'm making right now) in the next year, with the high likelihood that I can continue that high income for at least another 3-4 years. That is not guaranteed, however. If something happens to me and I can't work that income opportunity will go away.

My wife and I live on a "healthy" income but it's not "wealthy" by any means.

My thoughts are to refinance to a 5/1 or 7/1 arm. I know arms are typically frowned upon. But with our currently expected income situation, with a 5/1 or 7/1 arm we can totally pay off the mortgage in less than 3 years. That would be before the rate even had a chance to change. I've been doing a bit of shopping around and you can get 5/1 or 7/1 arms down under 3% now. It seems like a no-brainer deal to me to refi to a low rate arm and pay off the mortgage before the rate even has a chance to change. Worst case scenario, if something does happen, our income can still comfortably pay the normal mortgage payment without causing too many ripples in our personal life (that even includes a healthy cushion if we can get it paid before the rate adjustment and the rate takes a drastic jump).

What does the hive think? If I refi right now I have to be able to finalize and close it within 1 month and absolutely NO LATER than that. If I don't refi now, I will have to wait 6 months before I can refi.

Advice? Suggestions?

Why can't you just pay it off in three years under the current loan structure? If you intend on paying it off in that short a timeframe, there is no real difference between what you'll pay under your current loan and what you'll pay after the refi. Total, not monthly. You'll still be paying $170K plus interest, but at the rate you'd be paying down in order to pay it off in 3 years, you'd be paying so much into principal that there'd be very little principal for interest to be applied to.

Since your income increase is not guaranteed, and I presume that without it, you will not be able to pay off the loan in that short time frame, what will you do if rates increase over your current interest rate? I'm rather risk averse in this area. If it ain't broke....if you can't refi to a lower rate, I wouldn't do it. Have you thought about a 15 year loan instead. It's a rate reduction in an of itself and because it's amortized on the shorter time frame, you pay less interest for the life of the loan too. AND if you do get the income increase, you will just be that much better off for having more of your payments going to principal in the first place.

Final point: this is somewhat unrelated to your specific question, but don't forget to factor in the cost of the refi. Whatever benefit you derive from monthly payments savings must first pay-off the cost of the refi before you start seeing real savings in your pocket. If it cost you $1200 to refi and you get a $100/month reduction in your monthly payment, it will take you a full year before you start seeing any real savings. Now, that's not to say that having that extra hundred available to go somewhere else doesn't have its own reward. But from a purely cash in/cash out, assets/liabilities standpoint, you have to pay off the cost of the refi first.


ETA: assessed value for property tax purposes has limited value when attempting to determine the market value of a home. Particularly in this market. It's not even good enough to provide a ballpark figure, IMO. And for refi/loan appraisal purposes, it's absolutely worthless. If you want to know what the market value is hire an appraiser or talk to a Realtor. I'm betting that unless you've made significant improvements to it (or the value really was underestimated for initial appraisal purposes), it won't be much different. I bought mine in '08 and I'd feel blessed to get the same price for it right now.

 

[rockhopper46038]

I agree with a few of the last commenters. If you believe you will have the means to pay the property off in 3 years, just do so. An ARM on the amount you are talking about, even with the interest rate decrease you reference won't pay for itself over so short a term. Now, if you think there is a danger in that quick payoff plan, you could certainly consider a refi into a 30 yr fixed, which can be had for 3.875% and you will recoup closing costs within the time period you mention, plus be a lower fixed payment going forward if something were to happen. I would only consider an ARM if I knew for sure I would be out from underneath the property within the next three years. The Fed has said they will hold rates down for awhile, but they may not, and when rates DO raise, they may go up awfully far awfully quickly. I have rentals on 3/1 ARM's that have done nothing but adjust down for 15 years, but I consider that an anomaly, not the future. On the other hand, if you refi into a 30year at 3.875 then you have the luxury of paying it off fast, or not. I know the temptation to get property paid for, but frankly 3.875% is cheap money, and you may well be better off investing the extra money you plan on putting toward the house in something else. There is likely to be an investment vehicle available in the coming years that can do better than 3.875% return; there are reasonably safe dividend sticks that do that now and I would guess in 5 years that even CD's will be at 5% or better. In any case, these are just opinions. I know that having a paid off house is an alluring prospect.

 

[Grizhicks]

Another thing to think about, is staying with your current mortgage company. I did a refi about 10 years ago (30 @ 8% w/ 23 left, to 15 @5.75%), but did it with my same company and if did not cost me anything. Depends on how bad they want your business. -- Grizhicks

 

[DCR]

Let's do the math.

$170000 @ 5.75% = $9775 in interest per year
$170000 @ 2.9% = $4930 in interest per year

What's the question again?

 

[shibumiseeker]

88GT has the best advice I've seen here based on expected payoff times.

Even if you don't pay it off in the expected timeframe, the more you can knock off principle NOW the less overall you pay.

ARMs have a nasty tendency to bite people in the ass.

 

[jsnowy]

I would suggest to refinance with a 15 year fixed. You would still save money (even if you do pay it off in 3 years) and would have the security of a relatively low payment even if interest rates skyrocket and your income changes.

Kudos to you for desiring to get rid of that house payment. Debt is bad.

 

[D.B.]

I would suggest to refinance with a 15 year fixed. You would still save money (even if you do pay it off in 3 years) and would have the security of a relatively low payment even if interest rates skyrocket and your income changes.

Kudos to you for desiring to get rid of that house payment. Debt is bad.

^THIS. Best of both worlds, get a lower rate in case things don't work out on the income boost and if it does pay on the principle. We are in the middle of refinancing from a 30 (7yrs in) at 6.25% to a 15 at 3.125%. The new payment is going to be 20$ more per month! NO ARMs rates will only go up from here.

Edited to add: We are using our current mortgage lender for the new loan and they are being very helpful

 

[Hotdoger]

^THIS. Best of both worlds, get a lower rate in case things don't work out on the income boost and if it does pay on the principle. We are in the middle of refinancing from a 30 (7yrs in) at 6.25% to a 15 at 3.125%. The new payment is going to be 20$ more per month! NO ARMs rates will only go up from here.

Edited to add: We are using our current mortgage lender for the new loan and they are being very helpful

+1

 

[Dirtebiker]

Either refinance to a 30,20, or 15 year loan, or keep the loan you have. It doesn't make much difference if you will pay it off in three years!
it sounds like your not even sure your income will be what you think it is, so don't get into a situation where you could get caught up in an interest rate on it's way up!
If you are fortunate enough to double your income, that's great, put all that extra money in c.d.s or even a regular savings account so you can get to it when you want. Save up enough to write a check to pay your house off and just do it!
Congrats on the income boost!!!

 

[CountryBoy19]

Just to clarify a few points that others made.

My normal salary + my wife's salary has plenty of "cushion" if things happen and we don't get the loan paid off before the rate adjustment comes in 5 or 7 years.That is nota concern.

I have calculated staying vs. refi to an ARM and over the course of 5 years I will save approximately 15k including a conservative estimate of 2500 refi cost

To further clarify the possibility of losing my income boost there are only 3 things that could cause it to go away. #1 I no longer wish to be in the position that gets me that income boost, #2 I get injured and can physically no longer remain in that position, #3 The US military packs up and comes home (not happening soon).

 

[88GT]

Just to clarify a few points that others made.

My normal salary + my wife's salary has plenty of "cushion" if things happen and we don't get the loan paid off before the rate adjustment comes in 5 or 7 years.That is nota concern.

I have calculated staying vs. refi to an ARM and over the course of 5 years I will save approximately 15k including a conservative estimate of 2500 refi cost

To further clarify the possibility of losing my income boost there are only 3 things that could cause it to go away. #1 I no longer wish to be in the position that gets me that income boost, #2 I get injured and can physically no longer remain in that position, #3 The US military packs up and comes home (not happening soon).

I think it would benefit posterity if you could share your process regarding the cost comparison.

 

[CountryBoy19]

I think it would benefit posterity if you could share your process regarding the cost comparison.

I used 2 different online calculators, one was a calculator specifically intended for determining if it was beneficial to refinance. The other was just a calculator that compares multiple loans.

So using my current interest rate, principal balance, and a payoff term of five years, I then plugged in refi costs of $2500, new interest rate, and same balance. I got a savings of approximately $15k in both calculators.

 

[cburnworth]

i am going along the line of do not refi. pay an extra 50-100 a month along with an extra payment or or two a year. bank the rest. after 12 months pay whatever you have banked towards principle. You will pay the loan off faster, you will cut down the interest rate. another thing to take into account are your other loans,cars & credit cards. the sooner you pay those off also the sooner you can apply more to the house.

 

[tater86]

Go to a 15 year fixed and pay it off in 3 that will save you the most money if you can pay it. But like titanium man said if you pay one extra mortgage a year on a 30 year it will knock ten years of the time.

 

[pjcalla]

Do not go to an ARM. You can get a relatively similar interest rate going to a 15 year fixed. If you plan on paying it off early (5-7 years) that difference in interest expense won't be much. By going to a 15 year fixed, you will still have a cushion, just in case. You never know, you or your wife could lose your jobs, major medical problems, etc. Like I said, YOU NEVER KNOW.

I don't know your current financial position, but do you have savings that will cover all your monthly expenses for a minimum of a few months? If not, instead of paying off the principal early, get that savings up as high as you can. This will make it easier to "swallow" if something happens. After your savings are to an acceptable level, then apply that extra cash flow to the principal. Also, pay off all other debts (cars/credit cards) before you pay off your mortgage. You probably already know this since you are wanting to re-fi, and pay off your mortgage early.

I just re-financed last year, and went from 26 years left on a 30 to a 15 year fixed. I'm thinking of doing it again, since rates have dropped again. My mortgage broker, Union Savings Bank, has closing costs of $350, so it is easy to make up the cost of the re-fi. If you want the name/contact info of my broker, pm me. They are based out of Indy, but it would be worth the drive to save $2,000 (based on your estimate).

Another thing to think about is the appraisal. To get the best rates, you will need 20% equity. I will tell you that our house only appraised $10,000 over what we paid for it. We have done some improvements, and were a little disappointed with the appraisal, but the housing market is crap now. We originally had 20% down, so we were good, but it is just a reminder that what YOU think your house is worth, is not necessarily what the market will support. Appraisers are more cautious about their numbers than in the past. The government really came down on them after the whole real estate bubble popped.

... pay an extra 50-100 a month along with an extra payment or or two a year. bank the rest. after 12 months pay whatever you have banked towards principle. You will pay the loan off faster, you will cut down the interest rate....

Do not put extra money in the bank. You will get 0.05% interest or something ridiculous. You will be better off paying all you can towards the principal (after you get your savings up and other debts paid off). You will be losing money if you put extra into a bank (paying 3.5% and getting 0.5%).

Good luck, and it is great you are wanting to get out of debt.

 

[CountryBoy19]

Just to further clarify here. We have no other debt except student loans from my wife. Of which, only one of those is higher than our current mortgage, which should be paid off relatively soon.

No car loans, minimal credit card bills (paid off every month).

Just curious, but what is the advantage over a 15 year fixed vs. a 15 year arm with a 5/1 or 7/1 adjustment period? The only advantage I see is that "if" something were to happen and we can't pay the mortgage off before the 5 or 7 year fixed period, the rate is going to go up on the ARM, as opposed to the fixed staying fixed. The advantage is that with ARM's you can get better rates because there is less interest rate risk for the lender.

That is the appeal of an ARM, especially when you plan to pay it off quickly. Either way, I think I'm just going to hold out until after this 6 months is over and I've paid off 1/3 of my current mortgage. Then I'll look into the benefits of an ARM again.

 

[pjcalla]

Just to further clarify here. We have no other debt except student loans from my wife. Of which, only one of those is higher than our current mortgage, which should be paid off relatively soon.

No car loans, minimal credit card bills (paid off every month).

Just curious, but what is the advantage over a 15 year fixed vs. a 15 year arm with a 5/1 or 7/1 adjustment period? The only advantage I see is that "if" something were to happen and we can't pay the mortgage off before the 5 or 7 year fixed period, the rate is going to go up on the ARM, as opposed to the fixed staying fixed. The advantage is that with ARM's you can get better rates because there is less interest rate risk for the lender.

That is the appeal of an ARM, especially when you plan to pay it off quickly. Either way, I think I'm just going to hold out until after this 6 months is over and I've paid off 1/3 of my current mortgage. Then I'll look into the benefits of an ARM again.

The advantage of a 15 year fixed, is that you will know what the interest rate is for the entirety of the loan. Interest rates are going to rise, they have to, the fed rate is almost 0% now, so there is only one way to go. Like I said before, the interest expense difference in a fixed vs. ARM will not be that much if you are planning on paying it off in 5-7 years. I'm an accountant, so I like being conservative and knowing what to expect. "Fixed, known and measurable." IF something happens, and interest rates go down again, and you have not or are not close to paying it off, you can re-fi again (only if you will recover the closing costs and then some).