If you have been waiting for Congress to pass HARP 3.0 or have been previously turned down for a refinance because of lost equity in your home, you might consider trying to refinance again.
Mortgage rates are still ridiculously (artificial) low rates thanks to our governments continued support. Mortgage interest rates have been trending higher since late last year and may have some who have been “sitting on the fence” to lock in a 30 year fixed in the low 3′s as though they have missed out. A 10 year ARM may be worth considering.
A 10 year adjustable rate mortgage is fixed for 10 years and then at 120 months, the interest rate will adjust based on the current 12 month LIBOR plus a margin. The rate will then adjust again on the anniversary of the first adjustment date for the remainder of the term of the mortgage.
Let’s compare a 10/1 ARM to a 30 year fixed conforming mortgage. The quotes below are based on pricing as of 8:30 am this morning for a $400,000 loan amount, rate-term refinance for a Seattle area home owner with 740+ credit and a loan to value of $500,000 (80% loan to value).
I’m pricing both scenarios as close to “par” as possible – meaning with as little discount points or rebate rate credit as possible. If a borrower wants to lower the rate, they can pay more in discount points and if they want to reduce closing cost, they can increase the rate to create rebate pricing.
30 Year Fixed: 3.750% (apr 3.807) with net closing cost of $2335 and a principal and interest payment of $1852.46.
In 10 years, the principal balance of the 30 year fixed mortgage mortgage is scheduled to be $312,447.43 with $222,295 in mortgage payments over 10 years.
10/1 ARM: 3.250% (apr 3.305) with net closing cost of $2553 and a principal and interest payment of $1,740.83.
In 10 years, the principal balance of this 10/1 ARM is scheduled to be $306,917.21 with $208,899.60 in mortgage payments over 10 years.
The 10/1 ARM has caps of 5/2/5. “Caps” limit how much the interest rate can adjust up or down. To determine the new rate, the margin (2.25%) is added to the 12 month LIBOR at the time of adjustment.
The 10 year ARM currently offers a monthly savings of $111.63 compared to the 30 year fixed during the 10 year fixed period.
In 10 years, after the fixed period is over, the most the rate can adjust up or down is 5%. The highest the rate can be in 10 years is 5 plus 3.250% = 8.250%. Worse case scenario, the principal and interest payment would adjust to $2,615.14. The rate could not increase the full 5 percent, stay the same or drop as low as the “floor” which is the margin of 2.25 or anything in between.
If you are not planning on selling or refinancing your home before the 10 year fixed period is over, your risk is the uncertainty of where LIBOR will be 10 years from now.
The 10/1 ARM is also available for home purchases too.
If you have questions about buying or refinancing your home located in Washington state, or would like a rate quote, I’m happy to help.
Did you know that if your existing mortgage is FHA on your investment property, that it may qualify for an FHA streamlined refi?
Here’s the scoop for a non-owner occupied FHA streamlined refi:
I’m reviewing a scenario for one of my returning clients who currently have a 15 year fixed mortgage at 3.250% from when they purchased their Seattle home 1.5 years ago. The current balance is around $387,600 with a principal and interest payment of $2930.13. They do not have taxes and insurance included in their mortgage payments. My clients are considering another 15 year fixed mortgage or possibly a 10 year fixed mortgage.
Quotes below are with impounds waived (lenders typically charge 0.25% in fee when taxes and insurance are paid by the borrower instead of included in the monthly mortgage payment). Rates are based on mid-credit scores of 740 or higher and a loan to value of 80% or lower. Mortgage rates are as of January 8, 2013 and may (and will) change at any time.
2.875% for a 15 year fixed (apr 2.979) has a rebate credit which brings the estimated net closing cost down to $1229 based on a loan amount of $389,000. The principal and interest payment is $2663.04 reducing their monthly mortgage payment by $267.09.
2.750% for a 15 year fixed (apr 2.886) has closing cost estimated at $4195. The principal and interest payment is $2660.20 with a loan amount of $392,000. This scenario reduces their payment only slightly more to $269.93. If it were my choice, I’d opt for the slightly higher rate with lower closing cost.
Currently, the 10 year fixed rate for this scenario is actually priced slightly higher than the 15 year fixed.
2.875% for the 10 year fixed (apr 3.020) with $1700 in net closing cost after rebate credit. The principal and interest payment would be $3,733.81 based on a loan amount of $389,000.
Again, I would opt for the 15 year at 2.875% as the pricing is slightly better and I could always make the additional principal payment of $1070.77 (3733.81 less 2663.04) in order to pay down my mortgage in 10 years vs 15.
If you are interested in refinancing or buying a home located anywhere in Washington state, please contact me.
The WSJ reports that the Obama Administration is “eyeing” a refi program that would allow underwater home owners who currently do not qualify for HARP 2.0 to refinance their homes. Currently in order to qualify for the Home Affordable Refinance Program (aka HARP 2.0) the existing mortgage must be securitized by Fannie Mae or Freddie Mac and the “securization” must have taken place prior to June 1, 2009.
According to the article, White House officials and the Treasury would like to include mortgages that were not securitized by Fannie Mae or Freddie Mac. This program would possibly include non-conventional, “alt-a”, subprime and mortgages held by private lenders. There is no mention of expanding or removing the securitization date requirement in WSJ’s article, which many homeowners are desperately hoping for (also known as HARP 3.0).
In order for these expanded refi programs to be a reality, using Fannie Mae or Freddie Mac, Congress and the FHFA must approve them. When and IF this happens, I’ll be sure to announce that here at Mortgage Porter.
HUD has a requirement that in order for a borrower to do a streamline refinance their existing FHA mortgage, their scenario must have a “net tangible benefit”. FHA streamline refinances are popular today because they do not require an appraisal and FHA mortgage rates are very low.