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Refi WWYD?
I posted this on MM too (I wanted lots of perspectives but I'm putting on my suit of armor - usually when I post on national boards it somehow always ends badly for me...)
Wanted to get DC ladies' input too!
C&P from MM:
We bought our house in Jan. 2007 (hello housing bubble!) Our first mortgage is a 7 year interest only ARM at 5.75%, which will adjust in Feb. 2014. While that seems crazy now, at the time, we were going on experience: I had purchased a condo in 2002 on an ARM and refinanced down AND the condo gained value - best case scenario. We made quite a bit of money on that condo, enough to put a down payment on our current house. With this house, we hit the worst case scenario. It is what it is. Moving on.
We are underwater on our house. So underwater, in fact, that until now we were not eligible to take advantage of refinancing under HARP.
Things have changed, and we are now magically eligible for HARP - no appraisal needed. I guess we are less underwater than before. The Magic Eight Ball HARP program has put a value on our house that is actually probably pretty generous, so we are within the 105% what we owe vs. value of the house. (We have an option to get our house appraised if we think the Magic Eight Ball number is low, but then if we refi, the lender has to take the appraised value. Again, we think the HARP number is accurate/tending towards generous and we will not roll the dice on an independent appraisal).
If we refi now we would pay $5000 in closing costs out of pocket (obviously they don't want to roll closing costs into the loan, as we are still underwater). We have $5000 but it's half of our Efund, which we've been trying to build little by little as it is nowhere near six months of monthly expenses for us. The new 30 year fixed rate would be 5.5% (again, we're not eligible for fancy rates in the 4% range because of the underwaterness of it all). Which in the grand scheme of mortgage lending is a good rate.
Our payments will go UP $300 a month, as we would be in a regular fixed rate mortgage paying towards principal. DH is not as worried as I am about that extra $300 - but he's right - there are several things we could do to cover that - put my student loan into forbearance, decrease our contribution to TSP/401K, etc. At his job, he is billable and eligible for bonuses, so sometimes (not always, but sometimes) when we need more money he literally just works/bills more. He has to do it on nights and weekends, but hey, it's nice because he/I don't have to get a second job at night and on weekends.
Pros to refinancing now: the fact that we're even eligible to refinance seems like a minor miracle. We would have peace of mind - we wouldn't have to worry about our rate adjusting up (the ceiling is 10.75% - that's worst case) in three years making our payments out of reach. We're able to refi while underwater, which is what the program is all about. We'd start to build equity.
Cons: we half our Efund (painful), our monthly payments go up (we can deal with that I guess). In Feb. 2014 it is possible that our rate would actually go down. LIBOR yesterday was .77, so if our mortgage rate adjusted yesterday, our rate would be 3.02%. I wish I didn't know that. Maybe we'll kick ourselves in Feb. 2014 and say "we should have just let it adjust!" The biggest con is that it feels weird to refinance to pay MORE per month, and to lose half our emergency savings. (My dad's opinion is that this IS an emergency).
We have three kids in daycare. In Fall 2012 DD #1 will enter Kindergarten, and while we'll have to pay for aftercare, we won't be paying for full daycare/preschool, so in my head, as of Fall 2012, the $300 a month is going to be much less painful. Also at that time we could more aggressively build back up the Efund.
Crikey this is long. I am trying to think of all the details so anyone who has read this far and has an opinion has all the facts.
WWYD?
Re: Refi WWYD?
1. Do you have a balloon payment due when the rate readjusts in 2014?
2. Have you calculated what your monthly payments would be if the loan readjusts at the highest possible rate (10.75%)? Would it be an increase of more than $300/month?
3. What exactly does this readjusting interest rate entail? If your rate changes to something higher than it is now, is it permanent? Does it last another 7 years? Does it change every month?
I would do it. $300 more per month to start paying toward principal isn't that much. Am I right that you've been paying interest only this whole time? At some point you need to start paying principal because otherwise you'll be "renting" your house forever. I say do it when you can get a good rate (and historically a great rate). I'm surprised at how high the closing costs are, but I assume it's because of the HARP program. Is any of that escrow that you'll get back from your current escrow account?
Also, it's not weird to have your payment go up when you start paying principal. I think it's REALLY important not to have an interest only mortgage.
This exactly! We don't have one, and I'm curious to find out as well.
We've looked into refi, but can't...
Yes, the worst case scenario about be over $1000 more a month - that's def. worse than $300 more.
Fannie.
i wonder this too.
i'll tell you, we are in your shoes almost exactly only our 7 yr ARM on our first mortgage is set to adjust Feb 2012. we're actually looking to refi now and are also underwater.
i'm not a person who likes the "what ifs" so i'd probably refi and know I was in a more secure mortgage. even if the 10.75% is less than $300 increase, i'd still refi. riding out the next 2 years on uncertainty is not my cup of tea (which makes it so ironic i got this type of stupid loan in the first place! if i knew back then what i knew now...)
I would refi now to avoid being on edge for another year or two in case rates go up or your eligibility for HARP disappears again. (I'm a worrier when it comes to a big thing over which I have no control.) $300 now is a lot better than a worst-case $1000 later, and you start building equity that much sooner. When your daycare costs go down next year, you can throw all of that "extra" money into your e-fund every month.
And I agree with your dad - this would seem to be a worthy "emergency" to me. You're securing your stability and a home for your family.
Given this info, I'd probably refi.
Good grief, look at that sentence. "the worst case scenario about be over $1000..." I was typing really quickly before going into a meeting, but damn. I about be over tired I think.
I would look at the $5000 plus the extra $300 per month for the next three years and then take the worse case scenario of the highest interest rate and see what the break even point would be. Also, are you planning on staying here for a long time?
edit: you could start paying $300 extra a month now to build some equity.
As far was how long we'll be in this house - we're thinking another ten years maybe?
Does that change anything?
Is that 10 years no matter what, or 10 years if you at least break even on the house?
The cap, I assume that's the total cap right? Most arms also have a cap for how much it can move in a given year. I've typically seen 2%.
I assume it's a 7-1 and not a 7-5 or 7-7, right? I would be MUCH less concerned if was a 7-5 or 7-7 and would probably tell you not to refi if your plan is really 10 years. Especially if you have a cap on how much it can readjust in a given year. But with a 7-1, you're talking about 7 years of readjustment after 2014, so I would just bite the bullet and lock in now.
Also, after your arm period, do you have to start paying principal? If you do, then your rate will go up no matter what at that point, right?
ETA: I just saw that you said the mortgage payments would be out of reach if you ended up with the worst case scenario. To me that would be all the reason I need to lock in now. If we're just talking about an investment risk it's one thing, but you're talking about the risk of not being able to afford your home when you have the option to be able to afford it for certain. I don't think that's a risk you can take. It's not one that I could.