Confused about my home loans...

**safari** · 11-15-2006, 11:33 PM

Re: Confused about my home loans...

I'll try to help you. The reason you took 2 loans was to avoid paying PMI (private mortgage insurance). If the first mortgage is greater than 80% of the purchase price, you'd be required to pay PMI to the lender, which is useless for you and a waste of money, because PMI is not tax deductible. What you did was to take a piggyback loan (second mortgage) instead of paying the usual 20% downpayment, which is in most cases more benefitial, because you can deduct the interest from your income for tax purposes; however, if the interest rate on your second mortgage is too high, you have to look at the numbers and compare what would make more sense, either having a single mortgage and paying PMI or having two mortagages and no PMI.

Now going back to your current situation. If you're not planning to live in that condo for more than 5 years, it absolutely doesn't make sense to get a 30 years fixed loan. You should refinance both loans into a single loan with the interest fixed for the first 5 years. In order to be able to do that and avoid paying PMI, your condo must appraise for at least $277,500 because you want your loan amount ($222,000) to be less than 80% of the property value. Before you think about refinancing, you have to find out if your existing loans have any pre-payment penalty, which could be substantial, up to 3% of the loan amount. If there is a pre-payment penalty, it usually gets reduced by 1% after each year, so you might want to wait with refanancing.

The danger of ARM is that once the fixed period ends, the interest rate can vary, depending on the economic conditions. At any given point in time if you compare the ARM rate with a 30 year fixed rate, the ARM will almost always be lower than the fixed rate because with a fixed rate you're basically paying extra for insurance to protect you from interest rate hikes in the future. Once you get your fixed rate, it will stay the same for 30 years, no matter what the current interest rates are in the future. The only time it makes sense to get a 30 year fixed loan is if you're pretty sure that you will be living in the house for at least 8 or more years. Otherwise, there are different types of ARM's that are fixed for 1,3,5, or 7 years. Usally, the longer the fixed term is, the higher the rate is going to be. ARM is only dangerous for people who got a short term interest-only ARM loan because that was the only way they could afford to buy a house, which they otherwise couldn't afford. Once the fixed period ended and the interest rate jumped, those people were in big trouble. That's why you're seeing more people default on their payments now, resulting in more foreclosures.

The Interest Only loans make sense when the house prices are rising. Since you're not putting any money toward the principal with an Interest Only loan, the balance that you owe remains the same, so if the house prices are going up, your equity still grows. However, in the down housing market, if the value of your property decreases, you may end up owing more to the bank than the house is worth (it's called being upside down). If you're going to live in that house for a long time, it may not matter because eventually the housing market will be up again, but if you need to sell the house for whatever reason, you'll have to come up with additional cash to pay off whatever mortgage is remaining after your house sells. In addition, Interest Only loans usually have higher APR than regular mortagages, so you have to take that into consideration, too. You have to analyze your financial situation and see what kind of monthly payment you can afford. There are many calculators online that let you estimate your monthly payment, based on the interest rate and the amount of your loan. The best option for you would be to get regular (non interest-only) 5-year ARM, if you can afford the monthly payment.

I recommend you take a look at ING Direct's 5-year ARM, which currently has the interest rate of 5.875% (6.534% APR). Link. It comes with no points and a low closing cost of only $695. My friend refinanced with ING Direct last year, and the whole process was smooth and painless. You may find even lower rates if you shop around. You can use ING Direct as a starting point for your research.

Finally, to answer your last question, it appears that you're confused about the equity, which is the difference between the appraised value and the amount that you owe to the bank. The equity is yours in a sense that you can borrow against it. It's called home equity line of credit (with a variable rate, which is tied to the prime rate) or home equity loan (with a fixed rate). In fact, you already have a home equity line of credit, which is your second mortgage. You can't take your equity, like you suggested, to pay off your second mortgage because it would be like taking a third mortage to pay off your second mortgage, which doesn't make any sense. In other words, the equity can only turn into cash when you sell your house. While you're still living in the house, your can only borrow against your equity.

Hope this helps

**autoxer** · 11-16-2006, 03:40 AM

Re: Confused about my home loans...

Originally posted by Patty1966

I have been speaking with a bank who has offered to, for free, refinance our 2nd loan.

They don't do it for free. They may structure it, so that you don't have to bring any cash to closing, but their fees are there in some form or another.

**Diolla** · 11-16-2006, 04:18 AM

Re: Confused about my home loans...

"Now going back to your current situation. If you're not planning to live in that condo for more than 5 years, it absolutely doesn't make sense to get a 30 years fixed loan."

Now look back 5 years are you where you are now where you thought you'd be then? Unless you know that because of some life changing event you will be moving I have found that you can seldom predict where you are going to be in 5 years.

When I bought my first house we planned on being there 3-5 years, we actually stayed there 17 years! Back then they were just coming out with ARM's and we didn't get one but looking back now it sure was lucky we didn't.

JMHO

**Patty1966** · 11-16-2006, 12:08 PM

Re: Confused about my home loans...

Wow, you are all totally awesome. Thanks soooo much, especially to you, Safari for your wonderful explanation. I feel much less confused right now.

I spoke with the loan company that we have our loans with, and through it all I have come to the (hopefully smart) conclusion that our 1st loan is okay where it's at. Diolla, I heard you loud and clear...we have already been here 51/2 years (as renters), and only planned on being here for 2 to begin with. But we truly believe we'll be out of here before the 5-year mark hits again (maybe even before the 2-year mark because that's when our HOA dues start kicking in). If for some reason it's 4 years from now and we're still here, I'm ASSUMING that we might be able to refinance at that time? So with all these thoughts, I think our first loan is okay as-is...7% fixed, 5-year ARM.

The 2nd loan is turning out to be a little tricky (10.45% variable 5-year ARM). The loan company came up with some options so we can move away from the variable to a fixed loan. The only thing is, it will end up costing us between $1500 and $2300 to refinance it . This may or may not be worth it, which leads to what I hope will be my final question...

If, in fact, we DO move before the 2-year or 5-year mark hits, then would it even be worth it for us to pay this $1500-2300?

And if not, would it be better for us to just keep our 2nd loan as-is to see if the interest rate starts coming down on it's own? (Obviously, if the interest rate starts climbing then I think we would be better off paying that $1500-2300 to get locked in...am I right?)

Hmmmm, hope this is all making sense to you. It's in my head -- just hard to get it down in writing.

Thanks again, everyone.

**tinapbeana** · 11-16-2006, 12:27 PM

Re: Confused about my home loans...

the way i look at it is this: say you're paying $200 per month right now for this loan. refinancing will bring your payment down to $150, saving you $50 per month. over the course of 2 years, $50 per month is $1200

in the above scenario, you will be paying $2300 for the refi in order to save $1200 for a net LOSS of $1100.

assuming they charge you $2300 for the refi, you need to save $100 on the monthly payment to break even on the deal, much less to start actually seeing any savings.

**instantinfo4you** · 12-05-2006, 11:35 AM

Re: Confused about my home loans...

It definitely is not FREE. They are charging some kind of fees for this. There is no such thing as a free lunch.

Confused about my home loans...