Author Topic: Refinance worth it? No cost vs with closing costs  (Read 894 times)

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Offline Soylent Green Is People

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Re: Refinance worth it? No cost vs with closing costs
« Reply #15 on: March 11, 2019, 02:16:41 PM »
Interest Only loans are great - providing you have extraordinary discipline to either sell/refinance in 10 years, or plan to pay down the loan very quickly. Here's an example:

A $500k 30 Fixed rate loan at 4.0% has an initial payment of $2,387  :D

A $500k IO 10/1 ARM at 3.75 has an initial IO payment of $1,562  ;D

If you put $100k on this 10/1 ARM a year later, your payment drops to $1,250  ;D

If you don't put any money towards principal and 10 years later rates are now 6.75%, your payment will zoom up to $3,801   :o

If you don't put any money towards your principal and 10 years later rate stay the same - 3.75% - the payment is $2,964 - well over the 30 year payment you could have had!  >:D

IO loans serve a purpose and those with prior experience owning a home may want to consider them. As I also say often, I'm a big 2nd Amendment proponent, but recognize that not everyone should be granted the right to bear arms. IO loans used without experience can be dangerous to your financial well being. If you want one, be sure to know how they work  :-\

Thanks for reading.

Offline irvineband

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Re: Refinance worth it? No cost vs with closing costs
« Reply #16 on: March 11, 2019, 05:16:29 PM »
First rule: Never assume "oh, I can always refinance". It's a fools bargain. Income, loan limits, guidelines, and 10,000 other factors can arise that will prevent you from refinancing. Just because it was possible once before does not mean it will be possible again. Ask most folks who bought in 2005-2007 how their "Oh, I can always refinance" plans worked out. Many of the people who advocated this are today known as "renters".

Several theories - as that's all they are - on why an ARM might be a better way forward.

1) If you are only looking for an equity appreciation play for your present home ownership, why pay a higher rate for a 30 year fixed loan?

2) If you have a solid history of moving every 7 or 10 years, why pay a higher rate with a 30 year fixed loan?

3) If you see your income rising over time, and are unafraid of a rate change, why pay a higher rate with a 30 year fixed loan? Example: A $500k 30 fixed at 4% or a 10/1 ARM at 3.75 has a payment spread of about $72.00 per month, or $8,640 over 10 years. After 10 years let's say the rate on the ARM goes from 3.75 to 6.75%. That's now a payment spread of $601 between the 30 Fixed and the 10/1 ARM. Essentially, you're going to "pay back" that $8,640 savings in about 14 payments. Your break even between the two loans is roughly 11 years - and that's IF rates rise, you sell, or don't refinance. Those are pretty big "If's". You should ask yourself "Will I be earning $7300 more per year in 11 years than I'm earning today?". If the answer is "Yes", then the ARM worse case scenario would be a reasonable risk to take.

I tell everyone considering an ARM to consider this important thought: "If you are ever going to be awake at night, wandering the house wondering if you made the right choice on your ARM loan, take the fixed rate and don't look back". In the big picture, this should not be a question of payments, savings, best case or worse case scenarios. It's a question of peace of mind. Nothing more. If your personal peace of mind is met with a fixed rate, that's the right choice. If your personal peace of mind is met with an ARM, that too is the right choice.

My .02c

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This is awesome. Thank you for your thoughts. My friends view with his two properties is that he has put almost 50% down so the 10 year/1 Arm payments are low. He is also has both as rentals. Both have broken even at this point to cover monthly payment amd all costs. He plans to then use any excess over the mortgage payment that is earned to paydown the principal on a Heloc loan (35% of the value) that is interest only for 10 years from another (3rd) investment property. To me these loans seem very conservative with a LTV 50% when he says he purchased them but it is more like 40-45% now based on current values. Does that seem to make sense?

 

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