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?

UPDATE:  EFFECTIVE ON FHA CASE NUMBERS ISSUED AFTER DECEMBER 31, 2008, THIS PROGRAM IS NO LONGER AVAILABLE.

Since Mortgage Master Service Corporation has been a FHA endorsed lender since our inception, we are also approved for FHASecure.  This program is designed to help home owners who after their non-FHA ARM resets, have become delinquent.   

Here's more info:

• The mortgage being refinanced must be an adjustable rate mortgage that has adjusted (reset).  The mortgage being paid off cannot be a FHA mortgage.
• The home owners mortgage payment 6 months prior to the reset must show no instances of making late mortgage payments.
• Missed mortgage payments may also be included in the new loan (subject to having enough available home equity).
• The reset of the non-FHA ARM monthly payment must be what caused the home owners inability to make their monthly payments.
• The home owner needs to qualify for the new FHA mortgage (have sufficient income and resources per FHA guidelines).
• Loan amounts are subject to current FHA Loan Limits
• Subordinate financing (non-FHA second mortgage) is allowed if the new FHA loan is not enough to pay off the existing first lien, closing costs and arrearages.   
• Expanded loan to values up to 97.75%.
• Payment-to-income-ratio and debt-to-income-ratios remain at 31/43.
• FHA upfront and monthly mortgage insurance applies.
• Loan applications must be signed no later than December 31, 2008.

This program is not intended for home owners to stop making their mortgage payments once their ARM adjusts.   In fact, this is straight from the HUD Mortgagee Letter 2007-11:

"FHA reserves the right to reject for insurance those mortgage applications where it appears that a loan officer or other mortgage employee suggested that the homeowner could stop making their payments…"

I'm pleased to be able to offer this program and thankful that Mortgage Master has maintained their status as a HUD Approved Mortgagee. 

The best option is to refinance prior to your ARM adjusting (before you're delinquent).  As always, I suggest that you contact your Mortgage Professional if your ARM is scheduled to adjust within two years or less in order to make sure you're in the best position possible to refinance.