Author Topic: My Delimma  (Read 3100 times)

davef

  • Stubble
  • **
  • Posts: 221
  • Age: 36
  • Location: Wilsonville, OR
My Delimma
« on: January 23, 2017, 09:15:22 AM »
Here is my dilemma.

My wife and I are in our early 30s with a newborn baby.
We bought our house back in 2014 with a 5/1 ARM the rate is now at 3.125. When we bought it we expected to move in 2018. Now that is not going to happen,

With interest rates looking like they will be going up, and quickly I'm considering my options.

The home is worth somewhere between 420k and 440k.
We currently owe 262k
No PMA

The rate is fixed at 3.125 until June 2019 then can go up by as much as 2% per year to a maximum of 8.125 (Prime plus .125)

The rest of our financial picture.... We bring in about 100-110k and have been saving about 40% of that, in various means for the past 4 years.
the breakdown of that 40k is: 10k into 401k 11k into Roth IRAs 10k into college and school funds and 5-7k into the brokerage account.

as of today we have about 100k in the 401k. 40k in Roth IRAs. 10k in school funds (one for college and one for private primary schools)
we also have about 70k in a brokerage account.

Option 1 is to do nothing, that is, to keep doing what we have been doing until June 2019, splitting that 40 into the buckets above and then paying it down before the recalculation.

Option 2 is to pay it down now throwing all of my disposable income at it.

Option 3 is to refinance now to a fixed rate.

Sorry I hit tab enter and it posted 1/2 way through my post.
« Last Edit: January 23, 2017, 09:28:43 AM by davef »

Iplawyer

  • Bristles
  • ***
  • Posts: 308
Re: My Delimma
« Reply #1 on: January 23, 2017, 09:29:38 AM »
Refinance to a regular mortgage. You and we have no idea how fast or far interest rates are going to go up.

frugaliknowit

  • Handlebar Stache
  • *****
  • Posts: 1564
Re: My Delimma
« Reply #2 on: January 23, 2017, 09:35:16 AM »
How much beyond June 2019 do you think you will stay?  To me, that would determine whether you should go through the expense of "nailing down a rate".

At your ages, I would not prepay 3.125%, though I see nothing wrong with doing so.

Nick_Miller

  • Pencil Stache
  • ****
  • Posts: 693
Re: My Delimma
« Reply #3 on: January 23, 2017, 09:37:03 AM »
On a mortgage that large, yes I would refinance now since you've decided to stay long-term.

acroy

  • Handlebar Stache
  • *****
  • Posts: 1705
  • Age: 41
  • Location: Dallas TX
    • SWAMI
Re: My Delimma
« Reply #4 on: January 23, 2017, 10:06:00 AM »
I'd roll the dice on Option 1
-I doubt interest rates will go up much - the world is addicted to low/negative rates, I doubt there will be a systemic change any time soon due to the ridiculous global debt loads...
-Even if the rate does go up, it's tax deductible, so the pain is mitigated. your rate of returns on investments should go up along with it.
- There are costs to refinance, it's pretty expensive. Everyone has to get paid again.

Good luck!

SKL-HOU

  • Bristles
  • ***
  • Posts: 402
  • Location: Houston, TX
Re: My Delimma
« Reply #5 on: January 23, 2017, 10:21:05 AM »
I would do nothing until the interest rates get to a certain number, for example 5%. If it never gets there, great. If it does, go ahead and fix in the rate.

nereo

  • Walrus Stache
  • *******
  • Posts: 8632
  • Location: la belle province
    • Here's how you can support science today:
Re: My Delimma
« Reply #6 on: January 23, 2017, 10:32:04 AM »
I would explore option 3 just to find out what your rate could be if you fixed it now.

Otherwise, stick with Option 1: if rates go way up by 2019 you'll have substantial investments and a healthy savings rate you could use to attack the mortgage in 2019 if the rates go up above ~5%.  If they don't - stay the course.

davef

  • Stubble
  • **
  • Posts: 221
  • Age: 36
  • Location: Wilsonville, OR
Re: My Delimma
« Reply #7 on: January 23, 2017, 10:33:40 AM »
Great comments, of course, there seems to be a pretty big split on the issue.
For discussion sake,
PenFed offers a 3.5% on a 15 year fixed. My payment (P&I) jumps from 1450 to 1850. Which is tolerable, but $7300 due at settlement.

I've heard discussions that mortgage interest deductions may get the axe. SO as nice as that is, I dont want to bank on it. 

tweezers

  • Stubble
  • **
  • Posts: 183
Re: My Delimma
« Reply #8 on: January 23, 2017, 10:43:37 AM »
We were in a similar position as you a few years ago (a construction loan that was essentially a 5/1).  We ended up refinancing , but it would have been smarter to hold onto the lower rate.  That's all with hindsight, mind you.

If you do refinance; I know a lot of people here speak highly of PenFed and Aim Loan, but I tracked rates for 6 months in anticipation of refinancing, and never found them to have the lowest rates.  We refi'd in the fall with the company offering the lowest refinance rate on Zillow.  It happened to be HomePoint Financial and our rate is 3.125 for a 30 yr fixed.  Rates are higher now, but a quick look (for my geographic region anyway) show 3.0 with ~$1K in fees for a 15 year loan.  I think you can do better than 3.5 + $7500.


davef

  • Stubble
  • **
  • Posts: 221
  • Age: 36
  • Location: Wilsonville, OR
Re: My Delimma
« Reply #9 on: January 24, 2017, 01:02:34 PM »
I found rates as low as 3.0. or 3.25 on a "free loan" on a 15 year, I'm still unsure.

nereo

  • Walrus Stache
  • *******
  • Posts: 8632
  • Location: la belle province
    • Here's how you can support science today:
Re: My Delimma
« Reply #10 on: January 24, 2017, 01:27:00 PM »
I found rates as low as 3.0. or 3.25 on a "free loan" on a 15 year, I'm still unsure.
What are the transaction costs of switching to this "free loan" - still ~$7,300?

Monthly payments (P&I) at 3.0% would be $1802.  If you bundled in an additional $7300 it would be $1860.

What are your options for a 30yr fixed?

davef

  • Stubble
  • **
  • Posts: 221
  • Age: 36
  • Location: Wilsonville, OR
Re: My Delimma
« Reply #11 on: January 25, 2017, 01:36:20 PM »
30 year fixed was 4.0 with 4400 in loan fees.
there is also a 10 year ARM at 3.99 with zero fees, no appraisal, no title, no closing costs. And its with my current lender. I'm leaning toward that. I don't expect we will be here 10 years and if we are, I will have more than enough cash in the brokerage account to pay off the house entirely at that point.

Poundwise

  • Handlebar Stache
  • *****
  • Posts: 1132
Re: My Delimma
« Reply #12 on: January 25, 2017, 04:07:45 PM »
Posting to follow, we are in a similar situation with a Penfed 5/5 ARM currently at 2.5%, may max out at 6.5% in 8 years.

golfreak12

  • Bristles
  • ***
  • Posts: 272
Re: My Delimma
« Reply #13 on: January 25, 2017, 08:06:54 PM »
I did a 5/1 ARM back in 2005 with PenFed for 3.75(amount was $105K) This is currently a rental. After a few years I was able to do a RESET the loan(to 3.25%) for 1% fee when rates were dropping so much.
After another few years, I RESET the loan again when rates were at an all time low. For the same 1% fee, I managed to get a 2.75% rate.
Now 5 years later, the rate was adjusted to 3.5% this month. Because of a 5/1 ARM, it will adjusted every year.
The funny thing is I had been paying $444/monthly and with this adjustment, the monthly is now $339. The reason is because I only owe $55K left on it.
I remembered talking with my wife 3 yrs ago when we bought the main house that the ARM loans might cause problems because both houses were bought with an ARM loans. The main house were suppose to adjust in 2019.
Now 3 years later, we paid off the main house and the balance of the rental is only $55K which we can pay that off too. I left the loan alone because I can use the interests to offset the rental income.