A friend of mine asked me to offer advise on this, and I figured there is a lot more knowledge on here than I have. Opinions please?
Here is the situation:
Our adjustable interest only loan has reached it's anniversary date and is going to increase drastically. We have three options on the table at this time and our credit is good, but not considered excellent (mid-high 600's). Which would you suggest knowing the house (or what other companies/programs would you suggest):
1) is definitely going to be sold in the next 12-18 months
2) is located in a rapidly growing area (and has been a very rapidly growing area consistently, though granted that can change at any given time)
3) it has gained $24K in equity since the initial loan was made 2 years ago.
4) Needs a few repairs (estimating @$10K max to do everything we want to do)
Fixed Rate Conventional Loan Fixed Rate (90% LTV) - straight refinance
6.375% - no points, no prepayment penalty
6.125% - 1 point, no prepayment penalty
no cash advance
PMI insurance required (YUCK)
Closing costs @ $1700
(present payment increases about $100/mo)
80/20 Split Conventional Fixed Rate (up to 95% LTV)
6.375% - no points, no pre-pay OR 6.125% - 1 point, no pre-pay (1st 80%)
9.50% - no points, no pre-pay (2nd - 20%)
up to $14K Cash advance
No escrow required
(present payment increase at least $100/mo + cash advance terms)
Interest Only Option - Fixed Rate (can pay additional with no penalty)
@ 7.5% - optional points, no prepayment penalty, all closing costs included
up to $24K Cash advance (obviously would not max it out)
(obviously lower payment)
The first thing you need to do is have someone boot you in the rear-end for getting a balloon mortgage, especially considering how drastically interest rates have risen in the past two years. Two years ago, the only way the interest rate would ever go is up!
Second, I'd recommend holding on to your existing mortgage. Sure, the extra interest will hurt a bit, but if you're selling in twelve months anyway, why bother refinancing?
They're trying to avoid the much higher payment. And I wouldn't have gotten that mortgage either.
Just do a simple total cost analysis. If they sell in 18 months, what would the TOTAL cost of all four options (including no refi) be? Pick the option with the lowest overall cost.
Well, everyone's situation is unique...I got a MONTHLY LIBOR interest only adjustable rate mortgage 2 years ago. Yeah, I knew interest rates could only go up, but it allowed me to stay in my house which gained equity up the ass for those 2 years. Now, I'm refi-ing into a yearly interest only ARM, so I'll be able to stay here for at least another year. Trust me, I'd love to have the 5.35% fixed loan I had a while back, but I couldn't afford the $2000 a month payments, along with the $500 a month in taxes.
BTW, my last appraisal was $625K when I did the monthly arm. I though that was way low at the time, but this time, the assessment is $983K. Even if that first one was low, I've gotten $300K in equity in those 2 years by doing the LIBOR ARM.
There's no way I'll be able to stay in this house for more than a couple more years...between my health insuracne ($424/mo) and my real estate taxes ($520/mo and counting...they haven't announced this years rate yet), I won't be able to afford it. So, a minimum monthly payment is all I'm looking for, and I got piles of equity in the house.
Now, I agree with you that people who buy their house with these loans run the risk of becoming "upside down" in the house as rates go up. But for re-fiers with lots of equity, and short term plans, they can make sense.
Get a 1yr LIBOR or 2yr LIBOR and get a great interest rate and have the rate fixed for the first year or two to boot. Another option is to go with a Pay Option ARM for the lowest payment possible.
My 0.02. The rates he was quoted aren't the best either.
Your method is predicated on the assumption the housing prices will continue to rise. That may not be a wise assumption to make at this point. Virginia has by many measures a grossly overpriced housing market right now. Caveat emptor.
I can't see the refi being worth it if you are going to sell in 12-18 months.
You need to sit down and really add up all the costs. Appraisal, title insurance, etc.
Maybe get a HELOC?
Please explain, a HELOC?
Well, it's quite possible to see prices not rise as much as they have been...and God knows this area is overpriced already. I'm doing the re-fi 'cos I don't want to move, to be honest. The fact that prices have risen absurdly over the last 5 years is only a bonus lol. It's starting to taper off...but whether that only means a $50K a year appreciation versus a $100,000 a year appreciation, or that prices will actually fall, time will tell. If there's a way for me to get fu****d in the process, I'm sure it'll happen.
Bingo. Are they leaving the area after selling in 12-18 months? If so, consider selling now and renting.