Would You Refinance In This Situation?

[theduc]

My wife and I purchased a condo as our primary residence in November, 2011. Two weeks later I was laid off and we have since relocated to a different state for my new job. When we purchased the condo we put about 70% down and borrowed $45,000. Mortgage companies have certain rules when lending to purchase a condo... one of them is the Owner Occupancy Rate. Most mortgage companies want the owner occupancy rate to be greater than 50% and some want it to be 80%.

When we bought the condo, the owner occupancy rate was around 40% so we had a tough time finding a lender. We eventually found one but our only option was a 30 year 5-1 ARM at 5.5%. Our mortgage is only $250/month at the moment but that can go up in 2016.

That being said, we currently have a plan to pay off the remaining loan ($41,000) over the next two years (long before the interest rate could go up). We currently add an additional $1,200/month in principal to our payments and have plans to increase that to $1,800 or $1,900/month by the end of this year when we pay our car off (also adding extra principal to it each month).

Since the purchase of our condo, the owner occupancy rate has increased to be over 50%. Given that, we could possibly refinance for a much lower rate but are not sure if we should. Our original goal was to refinance before the rate could rise but that was also before our plan to pay it off in two years.

[lorraineb]

Two thoughts:

Plans don't always work out (as your job loss after buying shows). You definitely don't want to have the current loan in 2016 when it jumps.

Your current plan to pay off in two years makes refinancing not attractive unless you can do it without paying any fees or points. If you have to pay any of these up front, the loss will likely be more than anything you would save on interest charges over two years.

With this in mind, I would look to refinance only if it costs you nothing and if you can't find that, do the basic preparations to do a refinance (just in case that you can't pay it off in two years as you plan) so that if you have to refinance quickly, you have all your ducks in order.

[ua_guy]

It sounds like you're living in another state now. Not living in the condo, I'm assuming?

Most traditional mortgages require that to be your primary residence. You are correct--you would not qualify for a traditional mortgage on that place. You could check into a re-fi as a rental property, if you intend to rent it.

Otherwise, why not sell?
Or, as you stated, just pay it off. You have a plan to knock it out in 2 years, and, isn't the mortgage interest deductible for you?

FYI, if I would have stayed in my original 5/1 ARM on my home that I purchased in 2006, I'd be at a better interest rate now than I am after I refi'd 3 years go on a 30y fixed. Something to consider. But...back then we didn't think interest rates would literally hit rock bottom.

[theduc]

Two thoughts:

Plans don't always work out (as your job loss after buying shows). You definitely don't want to have the current loan in 2016 when it jumps.

Your current plan to pay off in two years makes refinancing not attractive unless you can do it without paying any fees or points. If you have to pay any of these up front, the loss will likely be more than anything you would save on interest charges over two years.

With this in mind, I would look to refinance only if it costs you nothing and if you can't find that, do the basic preparations to do a refinance (just in case that you can't pay it off in two years as you plan) so that if you have to refinance quickly, you have all your ducks in order.

Thanks Lorraineb, this was pretty much my thoughts as well... we'll most likely continue with our plan and if something comes up that prevents us from paying off the condo before the rate goes up then we may at that point look into a home equity loan to save on any closing cost or fees and then attack the home equity loan like we are the mortgage.

It sounds like you're living in another state now. Not living in the condo, I'm assuming?

Most traditional mortgages require that to be your primary residence. You are correct--you would not qualify for a traditional mortgage on that place. You could check into a re-fi as a rental property, if you intend to rent it.

Otherwise, why not sell?
Or, as you stated, just pay it off. You have a plan to knock it out in 2 years, and, isn't the mortgage interest deductible for you?

FYI, if I would have stayed in my original 5/1 ARM on my home that I purchased in 2006, I'd be at a better interest rate now than I am after I refi'd 3 years go on a 30y fixed. Something to consider. But...back then we didn't think interest rates would literally hit rock bottom.

Yes, we are now living in another state and have been renting the condo out for about a year already for about $2K/month... which is a pretty good reason not to sell it.