My ARM adjusted! Doom and Gloom!
Eegads, what will I ever do? I can’t possibly afford my house anymore!
If you have an ARM, and you are not a retard, then your ARM adjusting is not really a big deal. My rate will go from 4.75%, which was the introductory rate from when we bought the house 5 years ago, to 5.125%.
I should not trivialize a .375% increase, since that is an extra $375 in interest payments every year for every $100k you have mortgaged. If you could barely make payments when you moved into the house, then with the adjustment, well… you’re an idiot.
I, not being a mortgage idiot at least, did not move into a house I could barely afford, and I pretended that I was paying a 15 year mortgage at the 15 year rate instead of a 30 year mortgage with a introductory rate. After my rate adjusted up, my monthly mortgage payment adjusted down. There is a cap on the adjustable rate of 9.75%, so the worst case would have been that my mortgage would have gone up $180. While this worst case would suck, it is well within what is reasonable for me to pay for housing.
Should I refinance? Refinancing would raise my rate, so obviously the answer is no. What if my rate had gone up to 9.75%? Then refinancing would still probably be more expensive, but lets take the worst case rate change and the best case refinancing case.
My ARM goes to 9.75%, thus my payments increase $180. I can refinance for 30 years at 6%. To get that rate, I have to pay for title insurance, lawyers fees, origination fees and many imaginary fees. I could get a no fee loan with the loan costs baked into the rate, but I don’t want to consider that.
Pulling the original loan documents, and adding up all the fees that I believe pertained to a new loan, my loan cost $3,536.40. That does not include the 6% commission that goes to the buyers and sellers agents or the insurance due at signing or the mortgage interest prepayment or taxes. Those are fees tied back to the loan, and they might be less for refinancing a loan, but lets use these numbers.
At $180/month increase to me, when would refinancing to 6% become worthwhile? The difference between 9.75% and 6% is $230/month. $3,536.40/$230/month equals 15.375 months.
The problem with that scenario is that when my rate adjusts to 9.75%, I will not be able to get 6%. I just wanted to show how long it takes to reclaim the cost of refinancing when dealing with the extremes. If you had a loan from the 80s, it made sense to refinance if you are planning on living in the same home for more than a year. But if you were playing the refinance game in the 2000s, you were throwing money away and just could not see where it was going.
I will probably never refinance. The cost of refinancing will likely never be beneficial to me, since ARMs follow the current rates available, and the rates would have to make wild swings for my yearly lock to hit 9.75% when I could also refinance for a >6% rate in the same year.