Need Second Opinion about Refinancing

[jwrbike]

Hello, My name is Joe...,

Original Loan was $188,000 5.5% interest on 10year ARM (30yr term) 5.5 years ago. Payment is$1,067.44 + $280.90 (escrow) = $1,348.34. I am currently paying $2400/month.

I currently owe $123,568.45. My goal is to pay it off asap. BoA quoted me about 4% 5yr ARM with closing costs of $2100. Payment would be $885. I will continue to pay $2400/ month until next year when/if I get a raise, then I will increase payment.

Am I missing anything? This looks like a no-brainer. I should refinance, correct????

Thanks for the feedback.

[maat55]

If I were you, I would refi into an 15 or 20 year fixed. Interest rates only have upwards to go.

[jIM_Ohio]

If I were you, I would refi into an 15 or 20 year fixed. Interest rates only have upwards to go.

My math has the loan repaid well before 9 years. I did not do an ammortization table, but with $1100/mo extra going to principal, its OK to do an adjustable, assuming OP has confidence in job/income for next 9 years on current terms.

At $1600/mo to principal the loan is paid in full in no more than 6 years, and I think closer to 4 or 5.

[jwrbike]

Maat55 - I liked the 5yr ARM because of the lower rate. I am planning on having the loan payed off in 5 to 7 years. The loan has a maximum increase of 2%/yr and 5% max.

Jim - My income is secure. I have been paying extra for 5 1/2 years without missing a payment.

So. Refinancing makes financial sense?

Thanks for the comments.

[Slug]

The refinance is a no-brainer. The details of the refinance is the crux of it. I like your idea of the 5 year arm. My one pause comes on the size of your payments. It's clear that currently you have no problem with these payments. I would say that as long as you have a solid emergency fund and do not plan on making significant personal changes (e.g. have kids, marry a high maintenance gold-digger, etc...), then you are well on your way to owning your home outright.

[maat55]

Maat55 - I liked the 5yr ARM because of the lower rate. I am planning on having the loan payed off in 5 to 7 years. The loan has a maximum increase of 2%/yr and 5% max.

Jim - My income is secure. I have been paying extra for 5 1/2 years without missing a payment.

So. Refinancing makes financial sense?

Thanks for the comments.

I looked at a refi from 5.75 to 4.37 on my balance of 108k. I was not able to justify the lower rate. IMO, the safety of an fixed rate plays more of an overall role than the lower rate. It really depends on just how sure you are you will maintain the higher payment, but I always bet safety first.

[jIM_Ohio]

I looked at a refi from 5.75 to 4.37 on my balance of 108k. I was not able to justify the lower rate. IMO, the safety of an fixed rate plays more of an overall role than the lower rate. It really depends on just how sure you are you will maintain the higher payment, but I always bet safety first.

I agree the safety of the fixed rate is important for repayment terms 5-9 years or longer. With such a low rate on an adjustable, and a probable repayment plan of no more than 6 years, and probably 4 or 5, I think it makes sense to do adjustable and pay $500/mo extra to principal (that is a 50% increase off current P&I I think).

I also second that OP needs to have an EF which is about 6 months expenses for doing this to counter the risk of the rate going up.

[Kimber6]

Look around many places are doing lower closings or even no closing cost refi business right now

[jwrbike]

Slug -- thanks for the opinion. EF is in good shape and no plans for big life change. Oldest son goes to college in 6 years, so paying off the house in 5 years will be the goal.

Kimber6 -- I will look for a lower rate. BoA did not have a no fee option that was viable.

I am open to more info. Thanks,

Joe

[maat55]

I really do not see the advantage in a adjustable over an fixed on 15 years. You can get around 4.375 and maybe lower with a fixed. I would not hesitate to go with the 15 year fixed if the closings are roughly the same.

5 years from now, you may have indured an major financial problem and had not payed down the loan substancially. This would leave you wishing you had refied into an fixed, especially if rates are much higher in 5 years. All in all, I really question the benefit of an refi all together, if you are able to maintain the high payments.

[jIM_Ohio]

I really do not see the advantage in a adjustable over an fixed on 15 years. You can get around 4.375 and maybe lower with a fixed. I would not hesitate to go with the 15 year fixed if the closings are roughly the same.

5 years from now, you may have indured an major financial problem and had not payed down the loan substancially. This would leave you wishing you had refied into an fixed, especially if rates are much higher in 5 years. All in all, I really question the benefit of an refi all together, if you are able to maintain the high payments.

I agree with the idea there is LESS risk on a fixed rate loan.

But disagree on the last sentence (why refinance). If OP can save 5 years on the debt repayment, then the refi makes lots of sense.

9 years will be debt free on current terms
refi has OP debt free in 4-5 years (6 years worst case). $2400*36 months= $86,000 of cash flow on early payoff (worst case). Add $29,000 to that for every year earlier the loan is paid off.


So this is a risk-reward discussion
there is risk with adjustable, and if a 15 year fixed (or even 10 year fixed?) has a rate about .125% higher, I would go with the fixed rate loan, while still paying the high $2400/mo payments.

But if the rate on a fixed rate loan adds more than 2-3 months to the payment plan, realize that every month costs OP $2400 in cash flow at end of repayment cycle. $7200 (3 months of payments) is too much money to me to ignore over 3 months.

[jwrbike]

Thanks for all the feedback!!! Everyone will be happy. While working the phones and getting actual quotes I went with a 15yr fixed at 3.875% that costs $1800 (if appraisal is waived, which I hope it is.)

The 5yr ARM's were not much lower. I should save at least $4000-6000 in interest over the next 5 years and not have to worry about my old or new loan adjusting.

Thanks again for all your time and insight.

Joe