A gentleman from Bremerton called me wondering if he should refinance out of his VA adjustable rate mortgage. The start rate is 5.125%, however it’s scheduled to adjust in a few months. VA ARMs (and FHA) have the best caps available at 1%. The most his ARM could adjust worse case scenario would be to 6.125%. And his VA loan does not have any mortgage insurance (unlike an FHA loan, which could possibly justify refinancing).
He’s also considering possibly selling in a year or so.
The adjusted rate is very close to what I could currently offer him with a new conventional loan (a new VA loan would provide a higher rate). If he was considering living in this home "forever" and the thought of having an adjustable rate mortgage was causing him emotional grief (low risk tolerance); then I might recommend a different strategy.
His estimated mortgage balance is $224,000. I did not ask if the existing ARM is a 3 or 5 year fixed (I was driving during our conversation). Here’s some figures to consider:
- Worse case adjusted principal and interest payment for 5/1 VA ARM @ 6.125% = $1460.40 (amortized for 25 years).
- Worse case adjusted principal and interest payment for 3/1 VA ARM @ 6.125% = $1378.97 (amortized for 27 years).
- Conventional mortgage refinance (assuming 80% loan to value; which offers a better rate than a VA 30 year fixed) principal and interest payment @ 6.000% based on a loan amount with closing costs financed: $1378.40.
If the VA borrower has the 5/1 ARM scenario, it would take him just over 4 years to break even on the closing costs of the new refinance. If the VA borrower has the 3/1 ARM scenario, it would take over 9 years to break even using the conventional refinance.
What would you recommend?