Panda needs some advice : To Re-fi or Not to Re-fi

PANDA_IHB

PANDA_IHB

New member
As 30 year fixed mortgages are getting low again, I am not sure if it makes sense for me to refinance or not.



My situation:



I bought a house in Atlanta in 2006 that i am currently renting right now for $3000 a month. I had a 30 year fix at 6.375% on $350,000 including escrow for a monthly mortgage payment of $2800.00 a month. In January of this year, I refinanced to a 5 year interest only ARM at 5.625% where my payments are now $1617 a month for interest only with out escrow. I think i paid around $2500 - $3000 in closing fees. I regret that i did not finance for a longer term. My tenant is a dream tenant from heaven who installed a new irrigation system, fences, and built out the basement for me that has added some value to my home. He has also expressed to me that would be possibly interested in purchasing the house he is currently renting. His lease contract ends in Feb 28, 2010.



Short term goals:

My ideal scenario would be to sell my Georgia home to my tenant in 2010 and free up that cash for me to buy my dream home in either Irvine or Aliso Viejo, but he can easily change his mind in 2010. I also fear that my house can potentially go down 15 - 20% with mortgage rates at 10% in 2010. Currently my house is 7% less than what i paid for it in 2006. If mortgages rates are 10% in 2010, does my 5 year ARM reset up to 10% instantly in 2013? Would you recommend that i refinance the Georgia home at a 30 year fix. I do have quite a bit of down payment on the home and wouldn't want any change on losing the home from foreclosure.



I would appreciate any advice.



Thanks.

Panda
 
Is this gentleman interested in buying the home before his lease is up? I'm not familiar with the Georgia market but all things considered it may be better to sell sooner rather than later.
 
[quote author="PadreBrian" date=1221134827]Sell now. 5 years the housing prices might be close to what they are now, but the <strong>interest rate WILL be close to 8-10%</strong>.</blockquote>
O'rly...and what's your basis for that prediction???
 
Inflation. Bush was able to cut the value of the dollar in half...in only 7 years. No matter who wins in Nov, we'll see another 25% drop in the dollar value...and 8-10% will be needed to shore up the us buck.
 
[quote author="SoCal78" date=1221134012]Is this gentleman interested in buying the home before his lease is up? I'm not familiar with the Georgia market but all things considered it may be better to sell sooner rather than later.</blockquote>


The tenant wanted me to show him the offer before i list it on the market if i decided to sell. The Georgia market is quite different from Southern California market as northern Atlanta home prices only appreciated 4-5 % a year during the Real Estate Boom from 2000 - 2006, which Irvine homes were appreciating a rate og 20 - 30%. During the last decline of LA/OC in 1990 - 1995, the Atlanta housing market actually went up modestly or stayed flat, but did not decline. 2007 and 2008 is the first time in Georgia history that homes prices are declining. It is of my opinion that Atlanta will rebound before OC. I am hoping for a rebound by mid - 2009 for Georgia where i think a rebound will happen in OC in 2010/2011 time frame.



The tenant invested about $3500-$4000 from his own pocket to improve the home. I offered to pay 1/2 for the new $2500 irrigation system. I am wondering if this implies that that tenant has in the back of his mind that he would eventually like to purchase the home from me? I never bring up selling the home to him as i sort of enjoy getting a $3000 check from him every month where i immediately put the savings to my countrywide savingslink account.



I am sorry if i sound like a novice to all this as this is my first experience with rentals. I guess my questions are the following:



1. Will it make sense for me to refinance right now to a 30 year fix as the rates are low compared to the 5 year interest only ARM rate i have at 5.625% I have now? My 5 year ARM will expire in 2013.



2. If i am still holding the house in 2013, what happens when the 5 year ARM resets and the mortgages rates are at 10% in 2013? Does my rate go from 5.625% to 10% as soon as it resets?



3. What would be the financially optimal decision for me to make in this scenario?
 
[quote author="PadreBrian" date=1221137838]Inflation. Bush was able to cut the value of the dollar in half...in only 7 years. No matter who wins in Nov, we'll see another 25% drop in the dollar value...and 8-10% will be needed to shore up the us buck.</blockquote>


Padre,



I hope you are right about the 25% drop in the dollar because i have some of my Irvine down payment fund in Gold which I plan to use in 2010. I think that Awgee also believes that mortgage rates will be in the two digits between 2010 - 2013.



Panda
 
[quote author="PadreBrian" date=1221134827]Sell now. 5 years the housing prices might be close to what they are now, but the interest rate WILL be close to 8-10%.</blockquote>


Do you recommend that i bring up the topic of buying my home now to my tenant to see if he is interested or not? Also, if i sell my house to my tenant, does that mean that i don't have to pay any commission to a real estate agent? How do i go about selling a home to my tenant as i am not a licensed real estates agent?



Panda
 
[quote author="PadreBrian" date=1221137838]Inflation. Bush was able to cut the value of the dollar in half...in only 7 years. No matter who wins in Nov, we'll see another 25% drop in the dollar value...and 8-10% will be needed to shore up the us buck.</blockquote>
That would only happen if the economy growth goes into overdrive and that ain't happening for a long time. Your inflation argument isn't holding up very well, kinda like all the underlying commodities that make up inflation. Can you say ASSET DEFLATION??? Housing was the first and metals + commodities are next.
 
[quote author="usctrojanman29" date=1221161198][quote author="PadreBrian" date=1221137838]Inflation. Bush was able to cut the value of the dollar in half...in only 7 years. No matter who wins in Nov, we'll see another 25% drop in the dollar value...and 8-10% will be needed to shore up the us buck.</blockquote>
That would only happen if the economy growth goes into overdrive and that ain't happening for a long time. Your inflation argument isn't holding up very well, kinda like all the underlying commodities that make up inflation. Can you say ASSET DEFLATION??? Housing was the first and metals + commodities are next.</blockquote>


Bingo!! Great answer SC.



25% drop in the USD...interesting when you have a world wide slow down...ain't happening.



8-10% interest rates....yes if Commodities are still going up..they're not.



Your argument is BUNK Padre. I could see Fed Funds rate hitting 3-4% in the next 2 yrs. Mortgage rates on a 30 yr fixed could hit 7%-7.5% by then.
 
[quote author="usctrojanman29" date=1221137059][quote author="PadreBrian" date=1221134827]Sell now. 5 years the housing prices might be close to what they are now, but the <strong>interest rate WILL be close to 8-10%</strong>.</blockquote>
O'rly...and what's your basis for that prediction???</blockquote>


Mortgage interest rates are likely to rise regardless of what happens with the Federal Funds Rate. Banks make money by borrowing short-term and lending long-term. They profit on the spread between these two rates. With all the money banks have lost and are continuing to lose, their short-term cost of capital is going to rise, and the margins they will need to charge is also going to rise (they need to make back the money they lost). Risk has been grossly underpriced for far too long, and the repricing of this risk is going to cause mortgage rates to rise.



The credit cycle over the last couple of decades has seen lower and lower highs of the Federal Funds Rate. This cannot continue indefinitely.
 
[quote author="optimusprime" date=1221165539][quote author="usctrojanman29" date=1221161198][quote author="PadreBrian" date=1221137838]Inflation. Bush was able to cut the value of the dollar in half...in only 7 years. No matter who wins in Nov, we'll see another 25% drop in the dollar value...and 8-10% will be needed to shore up the us buck.</blockquote>
That would only happen if the economy growth goes into overdrive and that ain't happening for a long time. Your inflation argument isn't holding up very well, kinda like all the underlying commodities that make up inflation. Can you say ASSET DEFLATION??? Housing was the first and metals + commodities are next.</blockquote>


Bingo!! Great answer SC.



25% drop in the USD...interesting when you have a world wide slow down...ain't happening.



8-10% interest rates....yes if Commodities are still going up..they're not.



Your argument is BUNK Padre. I could see Fed Funds rate hitting 3-4% in the next 2 yrs. Mortgage rates on a 30 yr fixed could hit 7%-7.5% by then.</blockquote>
I'm sure a lot of people think that China, India, and other nations with fast growth can keep doing without a strong US....they are wrong as they are beginning to see now. If the US is down, you can bet that will effect almost every other large nation because we are a net importer.
 
[quote author="PANDA" date=1221158275]2. If i am still holding the house in 2013, what happens when the 5 year ARM resets and the mortgages rates are at 10% in 2013? Does my rate go from 5.625% to 10% as soon as it resets?

</blockquote>


What do the loan docs say? I know when I was shopping around the ARM resets were capped. I remember one that I think could only go up 2% max at the reset, and .5% every 6 months thereafter. Terms vary; you need to read what was agreed to.



No one without a crystal ball can say what's best to do. A strong demand for rentals for whatever reason could keep rents above your mortgage.
 
Are you going to make a profit on the sale? Currently, capital gains taxes are the lowest it's been in years. The president in 2013 may raise them, so why wait to make a little more, and absorb the risk of tax increases, interest increases, economic slow down, and dollar devaluation?
 
[quote author="optimusprime" date=1221165539][quote author="usctrojanman29" date=1221161198][quote author="PadreBrian" date=1221137838]Inflation. Bush was able to cut the value of the dollar in half...in only 7 years. No matter who wins in Nov, we'll see another 25% drop in the dollar value...and 8-10% will be needed to shore up the us buck.</blockquote>
That would only happen if the economy growth goes into overdrive and that ain't happening for a long time. Your inflation argument isn't holding up very well, kinda like all the underlying commodities that make up inflation. Can you say ASSET DEFLATION??? Housing was the first and metals + commodities are next.</blockquote>


Bingo!! Great answer SC.



25% drop in the USD...interesting when you have a world wide slow down...ain't happening.



8-10% interest rates....yes if Commodities are still going up..they're not.



Your argument is BUNK Padre. I could see Fed Funds rate hitting 3-4% in the next 2 yrs. Mortgage rates on a 30 yr fixed could hit 7%-7.5% by then.</blockquote>


What Kool-aide have you been drinking? The dollar will be in a fee-fall even if OPEC farts. 8-10% intrest rate is even being conservative...it could go even higher.
 
[quote author="PadreBrian" date=1221190960][quote author="optimusprime" date=1221165539][quote author="usctrojanman29" date=1221161198][quote author="PadreBrian" date=1221137838]Inflation. Bush was able to cut the value of the dollar in half...in only 7 years. No matter who wins in Nov, we'll see another 25% drop in the dollar value...and 8-10% will be needed to shore up the us buck.</blockquote>
That would only happen if the economy growth goes into overdrive and that ain't happening for a long time. Your inflation argument isn't holding up very well, kinda like all the underlying commodities that make up inflation. Can you say ASSET DEFLATION??? Housing was the first and metals + commodities are next.</blockquote>


Bingo!! Great answer SC.



25% drop in the USD...interesting when you have a world wide slow down...ain't happening.



8-10% interest rates....yes if Commodities are still going up..they're not.



Your argument is BUNK Padre. I could see Fed Funds rate hitting 3-4% in the next 2 yrs. Mortgage rates on a 30 yr fixed could hit 7%-7.5% by then.</blockquote>


What Kool-aide have you been drinking? The dollar will be in a fee-fall even if OPEC farts. 8-10% intrest rate is even being conservative...it could go even higher.</blockquote>


Actually it's more like what Kool-Aid have you been drinking ?



8-10% interest rates would KILL THE US ECONOMY and knock down whatever pillar it is still standing on.



Have you NOTICED that Saudi Arabia just said NO to any OPEC Production cuts today? Look at all the data and news around to piece together your thesis. Don't just toss your bunk around.
 
i think 8%-9% was the rate during late ninties, was it killing the US econ then?

Here's the concern I have, it depends also on how much money will be coming in from foreign investors? if its tight then defn interest rate will be 8%-10%. since many banks r liquated i don't think foreign investor will return to US in a big way specially until unless fed fix its own fin. system. Low interest was b'coz of too much money available and i don't think its happening atleast in the next 5 years again.
 
[quote author="irvine2010" date=1221191652]i think 8%-9% was the rate during late ninties, was it killing the US econ then?

Here's the concern I have, it depends also on how much money will be coming in from foreign investors? if its tight then defn interest rate will be 8%-10%. since many banks r liquated i don't think foreign investor will return to US in a big way specially until unless fed fix its own fin. system. Low interest was b'coz of too much money available and i don't think its happening atleast in the next 5 years again.</blockquote>


Late 90's environment vs leverage in today's environment.....apples vs oranges.



Can't apply the same logic.



This is a de-leveraging.
 
[quote author="optimusprime" date=1221191913][quote author="irvine2010" date=1221191652]i think 8%-9% was the rate during late ninties, was it killing the US econ then?

Here's the concern I have, it depends also on how much money will be coming in from foreign investors? if its tight then defn interest rate will be 8%-10%. since many banks r liquated i don't think foreign investor will return to US in a big way specially until unless fed fix its own fin. system. Low interest was b'coz of too much money available and i don't think its happening atleast in the next 5 years again.</blockquote>


Late 90's environment vs leverage in today's environment.....apples vs oranges.



Can't apply the same logic.



This is a de-leveraging.</blockquote>




You got that right.

There?s plenty of bad debt out there that they?re still trying to flush out.
 
I can't foresee the market being an easier in 2010. For me, i'd sell early and start looking to invest into more solid "investments". I also don't think the rates getting any better (I have a strong belief that they will go to the 1x% before the economy starts to pick up again) and with that the dream renter might be priced out of the purchase. When in doubt, I have always taken the money and moved on.



good luck

-bix
 
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