Refinance vs. ARM rate reset ... would you just let it reset?

My ARM is tied to the 1-year LIBOR, which is at historic lows. It's due to reset in four months, from 5.375% to a rate of the 1-year LIBOR plus 2.25%, 45 days out from the change date, so mid-November. The rate I get for next year may be as low as 3.75%, and is unlikely to be any higher than 4.50%, as the 1-year LIBOR doesn't seem likely to jump back up anytime soon.

It seems silly, with all the talk of toxic ARMs, to just let the rate reset, but the alternative seems downright stupid. Refinancing to a 20-year fixed at 4.875% gets me a marginally lower guaranteed-fixed rate, but the cost of it seems punitive: two discount points ($3,500), tax/stamps ($900), title insurance ($900), closing fees to the bank *and* the closing agent ($1,100), another couple hundred in miscellaneous fees, our (unused) HELOC would be cut from $70k to $20k to get us at less than 75% LTV, and on top of it all, the principle amount would go up $2,500. We'd need to bring almost $7,000 to the table.

Have any of you been in this situation? Doesn't it make sense just to let the ARM reset?

And it makes me wonder...all these people who are getting killed by their ARMs, are they tied to a weird Index or something? How come my ARM reset is poised to save me $200 a month in interest when other people are being foreclosed on because of "bad ARMs"?

--Chris

My arm reset this January. (5/1 ARM) was at 5% now at 3.875%. I also have been watching rates drop and been considering a refi. But I can't see getting a rate better than 3.875 so whats the point? Also if anything I expect it to lower again this year. Also if yours is anything like mine there is a max it can raise or fall in a year so even if rates start to go up I have some time. So I chose to not bother with a refi. Only other data point is I only owe about 50k more on the house. So at this point I plan to just pay the house off faster if rates go crazy.

cjspangler said: [..]1-year LIBOR plus 2.25%[..]
people who are getting killed by their ARMs, are they tied to a weird Index or something?
--Chris

Subprimers reset to LIBOR + 6% and more, their 'teaser rate may have been 6% and then they reset to 10%'.

I recently people who paid $7k monthly interest on a 520k balance. Needless to say, they could not pay with 50k annual household income.
They did not speak English very well and truly have been played.
At least they lived there 18 months without payments. They knew how to play the bank as well.

-Peter

ptiemann said: cjspangler said: [..]1-year LIBOR plus 2.25%[..]
people who are getting killed by their ARMs, are they tied to a weird Index or something?
--Chris

Subprimers reset to LIBOR + 6% and more, their 'teaser rate may have been 6% and then they reset to 10%'.

I recently people who paid $7k monthly interest on a 520k balance. Needless to say, they could not pay with 50k annual household income.
They did not speak English very well and truly have been played.
At least they lived there 18 months without payments. They knew how to play the bank as well.

-Peter

They must have really played the bank, 500k loan on a 50k income... There is no way even back in 05/06 that a person could qualify for a 500k mortgage on a 50k income is there? ~3000/month payment on a $4000/month income wouldn't even have worked back then either their income has changed a lot or there was some kind of fraud involved.

Usorry said: How long do you plan on being in your house?
The question is more like, how long do we plan on keeping the house? It was our primary residence two years ago; now it's an "investment property" and is currently being rented. Because it's an investment property, we would have to cut the HELOC get in under 75% LTV, and they would charge us 2 discount points. If it had been simply a second home, it would have been 85% LTV and essentially zero points.

The real estate market in that neighborhood isn't bad, but it's not great either, so we likely won't sell it for at least two years, until prices in the area have made some rebound. (If we had sold at the height of the real estate market, we could have gotten $340k for it. The appraisal came in at $275k. I'd like to get $310k for it, whenever we sell.) In the meantime, we have a stable, professional tenant who has kept the interior of the house very well.

There is also the chance that we could move back to the area in a few years. If that were the case, leaving the ARM to reset for a couple years until we can call it our primary residence is a choice we can easily live with.

--Chris

cclyde said: The answer to this question is usually how long do you plan to stay in that house?
Yep, see above.

cclyde said: My 5/1 (1 year Treasury based) reset in July from 5.5 to 3.5 (the floor, and max 1 year adjustment of +/-2% The index+margin was actually a little lower). We are in a small house, and plan (hope?) to move to something larger in the next few years, so it doesn't make sense to refinance.
I re-read my Adjustable Rate Rider yesterday and saw something that didn't register with me at the time we signed the papers, almost seven years ago. The *initial* rate adjustment has no minimum or maximum adjustment amount, except for the absolute maximum of the 5% over the initial rate (so 10.375%). Most ARMs are written so the most the rate can move on any change date (first or subsequent) is limited to 2% up or down. If we had been in more prosperous times, my rate could jump from 5.375% up to 10.375% on the first adjustment date!

--Chris

shadowfax2 said: I am curious if you got a letter on the adjustment date to have an option for a fixed rate. I have a 7/1 resetting in Nov 10 and called citibank to see what options i have. They stated that a month prior to the reset date, I will have the option to fix the rate. Is this true
The date the rate gets fixed for the next year isn't until mid-November. Considering the hassle that the refinance was going to be, I sincerely doubt that they'll offer to fix it with any ease.

Then again, they have a vested interest in not letting the mortgage reset to close to 4.00%, so maybe they'll offer an inexpensive option for a fixed rate. I'll let you know!

--Chris

cjspangler said: If we had been in more prosperous times, my rate could jump from 5.375% up to 10.375% on the first adjustment date!That was the risk you took. And it paid off. So enjoy the ride.

LawrenceofArabia said: So what are you going to do? Are you going to wait it out?
At this point, I don't see any reason not to wait it out and see where it resets. Who knows, maybe I could be surprised and the bank could offer me a fixed rate with significantly lower costs, just to keep from only getting 3.75% on it?

--Chris

I'm in the same boat. I have a 4.1% ARM resetting in a couple months that was taken out 5 years ago. The reset should put me at the same rate (or even lower). I have slightly negative LTV so the only way to get a fixed rate is to throw more money into it and it's just not worth it.

However, it really comes down to (i) what you believe are the L/T interest rate trends; and (ii) how long you think you will own the property either as a resident or a rental. If you worry that L/T rates could go back to high single-digits or low double-digits for a sustained amount of time in the next 10-30 years, then I would lock-into a rate today. If you can't see yourself keeping the property more than 5-7 years, I would not bother. We can assume the economy will suck it up for at least another year, so if you balance 'favorable' rate trends vs 'unfavorable', you probably will be at 5-6% over 5 years. That's not bad. If you sell the place at year 5, you probably had an effective rate that is close to a fixed rate without the refinancing costs

From mid-1994 through the beginning of 2001, the 1-year LIBOR was fairly flat, meandering between 5.00% and 7.00%. At the beginning of 2001, when the last recession started, the 1-year LIBOR dropped off a cliff and ended up below 3.00% by September of 2001. That recession lasted until the end of 2001, a relatively short three quarters. The 1-year LIBOR dropped further to below 2.00% as the economy began its recovery, and stayed there until May of 2004.

If the 1-year LIBOR remains low as the economy recovers for a similar period, at least two years after the recession ends, then I'll be in good shape for at least one year, maybe two. There are arguments to be made that this recession will have a slower recovery, especially with respect to real estate and employment, so there may be an even longer period before the 1-year LIBOR climbs again.

BlueEyes, your point is well-taken. Part of anyone's decision-making process should be to take into account the availability and cost of money now vs. in the future.

--Chris

chimeer said:
They must have really played the bank, 500k loan on a 50k income... There is no way even back in 05/06 that a person could qualify for a 500k mortgage on a 50k income is there? ~3000/month payment on a $4000/month income wouldn't even have worked back then either their income has changed a lot or there was some kind of fraud involved.

fully agree. Liar's loan. By the way, purchase price had been $628k, and of course 'no money down' (80/20 loans, the 520k mentioned above was just the 1st foreclosing).

The biggest craze I saw recently was the unemployed mother of 4 who purchased a house for $720k, also $0 down, 80/20 financing. She actually made a lot of money renting all rooms and not paying mortgage; I estimate her profit to be between $100k and $150k in rents, depending on her vacancy rate and collection success.

-Peter

Your arm isn't the best deal out there, but it is far far better than the toxic arms, which reset to 1y libor+8% for example, after 2 year.

cdominey, I think that mortgageprofessor's page is set up as decision tool for people to decide between a new ARM vs a new FRM.

Great link / tool by the way. I tried it out yesterday.

Now we just need know how LIBOR will be for the next 10+ years

ptiemann, the calculator says it's for "borrowers with an ARM...trying to decide whether they should refinance into an FRM." Meaning they have an ARM already. Which is why it doesn't make sense to me that you would exclude any closing costs since by not refinancing, naturally, you wouldn't be paying them. Maybe TMP needs to change the wording, but does anyone else understand this?

fasttimes said:
Your answer is here. Enter your best guesses and report back to us.

http://www.mtgprofessor.com/Calculators/Calculator3e.html

Okay. Lots of assumptions there, but I guess the important ones are, that we plan on keeping the house for five years, and the assumptions about future interest rates.

I chose two: First that the index rate would rise steadily, starting in year two and rising at 1.25% per year for 4 years. (That would get it back up close to its historical range of 5-6%.) Second, that the rate would be volatile, first rising and then falling by 3% every two years.

The figures turned out to be closer to break-even than I thought they would be. The steadily rising index rate would end up saving us $3,000 over five years. The volatile index rate would end up costing us $3,000 over five years. So it's a bit of a crapshoot, depending on whether you think the index will be volatile or not.

Personally, I think not. At the end of the last two recessions, the rate rose steadily, without volatility. Doing a rough year-to-year analysis of the 20-year graph from a previous post, I see that the LIBOR generally rises or falls no more than 1.5% per year, with unusual exceptions. Generally, the year-to-year change is no more than 1.0%. And as I noted in a previous post, the odds of this being a quick recovery are slim; rates will be steadily low for at least a year or two, rising only when the employment and real estate markets start to recover.

--Chris

OK, I wrote the Professor himself to ask my closing costs question and here was his response:

"That popup must have been mindlessly carried over from another calculator, you are right, there are no costs on the existing loan. I'll get that fixed.

JMG"

The "Rate of Interest on Savings" should be self-explanatory. If you put money in a savings account, what rate of interest do you get on it? I put 1.5%, since most of my savings is in ING Direct or Ally Bank.

--Chris

I have a similar opinion about the steadily rising 1 year LIBOR as cjspangler, but when I ran the calculator it looks like I need to stay at least 7 more years in the house to begin seeing some benefit to refinancing to a 30 yr FRM. My particulars:

5/1 ARM taken in July 2004 has reset to 3.875%
2% annual caps, 10.375% lifetime
Index: 1 year LIBOR, 2.250% margin
Owe $149000 on house
Next reset takes place July 2010

We don't want to live here longer than 5 more years or so, but my wife is out of work and we need to stay put for now. Plus I want to give the market time to turn around, even if I have to rent the house after we move (we live in Atlanta).

So if we commit less than 7 years (according to my reading of the calculator), maybe we'll refi into another ARM - or just ride out the one we have.

Anyone have any thoughts?

I am riding it. The rate reset is going to be 2.625%. But I have to point out the rounding to nearest eighth always rounded up for me!

My ARM resets in Oct. 2010 and I face the same dilemma. I am not tied to the LIBOR, but the Treasury constant maturity index - http://www.bankrate.com/rates/interest-rates/1-year-cmt.aspx.

+2.25 to that and it is still lower than my 4.625% current. Should I risk it or consider refi. I don't know if I am going to be in the house long enough to justify the closing cost. Any advice ?