HELP! MY LOAN IS ADJUSTING!
Stacey Fleece is a Senior Loan Consultant for Princeton Capital at 1699 Van Ness Avenue, San Francisco, CA 94109.Ah…the glory days of home buying! Remember back in 2003 when you bought that $800,000 condo, put 5% down and got a 5-year interest only ARM at 4.875% with no points? Sure…the rate on your equity line 2nd lien has gone up a lot over the past four years but your 1st lien is locked for five years…what a steal!
Fast forward to 2007…less than one year left on that ARM and when you hit your adjustable period, the rate would change to LIBOR plus a margin of 2.5%. Based on today’s market, that equates to a whopping 8.75%! But don’t panic – now is the time to consider refinancing out of that ARM into a new ARM or even a 30-year fixed before rates start moving higher. There is still time to get a low rate and the impact to your monthly payment will be significantly less than if you continue to hold your mortgage in the adjustable period.
Let’s look at a real world example on that $800,000 condo you bought in 2003…
Let’s assume your current mortgages breakdown as follows:
1st lien - $640,000 at 4.875% interest only – payment $2,600.00
2nd lien - $120,000 at prime+0.5% interest only – payment $875.00
TOTAL MONTHLY MORTGAGE $3,475.00
Now…how will this mortgage look in 10 months when you hit your adjustable period on the 1st lien? Let’s take a look:
1st lien - $640,000 at LIBOR+2.5% interest only – payment $4,666.67
2nd lien - $120,000 at prime+0.5% interest only – payment $875
NEW TOTAL MONTHLY MORTGAGE $5,541.67
That is a 59.5% increase over the current mortgage payments. Yikes! What can we do about this now to prevent such a large jump in payment? Plenty…
Let’s assume that your $800,000 condo has appreciated in value 5% per year over the past four years. That would put your current value on the property at $972,000. That is good news because now your 1st and 2nd liens combined fit under the “magic” 80% loan-to-value lender rule ($760k in total liens vs. $972k in value is 78.2% loan-to-value). Why should you care? Because that means on a refinance, you can roll your 1st lien and 2nd lien together in one which would put the entire $760k outstanding balance at a 1st lien rate!
Now let’s evaluate current payments versus payment on a new lien. Yes, the rate on the 1st lien will increase. Get with reality…5-year ARM’s are just no longer in the 4.875% range. However, since we are able to roll the liens together into one, the rate on the $120,000 2nd will be much lower on a refinance. If you were to refinance the above loan scenario today, here’s how it could look:
1st lien - $760,000, 5-year ARM interest only @ 5.875% - payment $3,720.83
NO SECOND LIEN
TOTAL MONTHLY MORTGAGE $3,720.83
The monthly increase is only $245 higher than your current financing…and it is over $1,800 LOWER than what your future holds in monthly payments based on your pending adjustable loan…you could even refinance to a 30-year fixed, still save loads off your adjustable payment and lock in the rate for the life of the loan!
Do yourself a favor and start looking into refinancing that mortgage now while rates are still low. There are no guarantees on where rates might be 10 months down the road and you know what they say…a bird in the hand…!
- Stacey Fleece
415.229.1228 (office)
866.248.2642 (fax)
415.596.6069 (mobile)
staceyfleece@princetoncap.com
www.princetoncap.com/staceyfleece
posted by SFResidence.com @ 8:38 PM
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