Refi into Pen Fed 5/5 ARM

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NOVACPA
Posts: 104
Joined: Mon Apr 28, 2014 4:13 pm

Refi into Pen Fed 5/5 ARM

Post by NOVACPA »

Good Afternoon -

Long-Time Lurker and First-Time poster... Thanks for all the advice you all provide!

I am ready for a post of my own.

I am looking into refinancing into PENFED's 5/5 ARM product (w/o 1 click rate reset).

FACTS:
No Closing Costs
No Origination Fee
Current Balance: $230,321
Current Payment (P&I): $1196.66
Current Rate: 4.625% 30 Year FRM with 29.5 years remaining
PenFed 5/5 ARM Rate: 2.875%; Adjusts every 5 years with maximum adjustment is 2% & maximum lifetime adjustment is 5%.

Assumptions:

I will own this place for 30+ years (either as a primary residence or a rental)
I will continue to make the $1196.66 payment after the refinance
Rates will not go lower

Questions:

1.) Am I better off holding the 30 year FRM for the duration or refinancing to the 5/5 ARM?

I have done the extra payment calculator on the ARM via the mortgage professor's website compared the total amount of interest paid on the FRM to the ARM and in only one scenario do I come out behind. That was the worst case scenario (2% adjustment every 5 years to the maximum lifetime cap of 7.875%). I ran other scenarios and weighted that worst case to 80% and still had a positive expected value.

2.) Am I missing something?

For what its worth, I looked at the 15/15 as well and the numbers didn't work in my favor.

Thanks for any insight you can provide.
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windhog
Posts: 256
Joined: Tue Dec 09, 2008 12:08 am

Re: Refi into Pen Fed 5/5 ARM

Post by windhog »

Hi and welcome,

Have you run the numbers with some planned increases of your payments? If you could get a better rate and finish paying before the last potential rate increase, maybe you would have a clearly superior choice. Just a thought...

Paul
jedblanks
Posts: 49
Joined: Tue Nov 12, 2013 2:14 pm

Re: Refi into Pen Fed 5/5 ARM

Post by jedblanks »

You don't mention your current home value, and of course appraisal will be part of the process, but:
Penfed will want at least 10% equity.
20% will allow you to forego PMI.
25% will allow you to forego Escrow.

You can remove PMI 2+ years later (24 months good pmt history)

5/5 ARM is better if you are planning to pay additional because the rate and payment reset every 5 years.
So if you pay ahead, even with rate increase, your payment can go down.

5/5 ARM is better if you plan to stay less than 5 years because you will build more equity in the promotional int rate period, some of those savings being eat up by PMI payments if you are in that situation.

At 10 years, the rate is about a wash between 5/5 and 30 year if you only pay min payment. beyond 10 years, 30 FRM is better if you don't pay extra principle. and at 15 years your savings from them paying closing costs will likely be eat up by the difference.

But who knows what will happen in 15 years? Maybe a 6.8% mortgage rate will be stellar when you earn 10% on deposits?

FWIW, most likely if you continue to pay your current 4.625% mortgage payment on the 5/5 ARM, you will be essentially paying a 15 year mortgage payment, at least until the 10 year mark, assuming the rate goes on the max amount each time.
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kenyan
Posts: 3015
Joined: Wed Jan 12, 2011 11:16 pm

Re: Refi into Pen Fed 5/5 ARM

Post by kenyan »

NOVACPA wrote:
1.) Am I better off holding the 30 year FRM for the duration or refinancing to the 5/5 ARM?

I have done the extra payment calculator on the ARM via the mortgage professor's website compared the total amount of interest paid on the FRM to the ARM and in only one scenario do I come out behind. That was the worst case scenario (2% adjustment every 5 years to the maximum lifetime cap of 7.875%). I ran other scenarios and weighted that worst case to 80% and still had a positive expected value.

2.) Am I missing something?
Don't think you're missing anything too important - we went through a very similar exercise 4-5 months ago, when we elected to refinance our 4.75% 30-year FRM (only 4 months in) to a 5/5 PenFed ARM at 2.625% with no closing costs. We are taking some of the cashflow relief at this time, but are paying extra principal. In the worst case, we will end up behind our former FRM sometime in year 20. Paying even more principal down (as you propose) would push this out further. Naturally, selling or refinancing again before 20 years are up puts the win in the column of the 5/5 regardless of future interest rates.
Retirement investing is a marathon.
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Watty
Posts: 28860
Joined: Wed Oct 10, 2007 3:55 pm

Re: Refi into Pen Fed 5/5 ARM

Post by Watty »

I have that loan but I am planning to have it off in about seven years and so far it is working out well. Somewhere in the loan process they asked me if I wanted a PenFed credit card too and they have some with very good features especially if you ever travel overseas. My refinance went through quickly but some people have had it take longer than expected. When I did mine they gave a long rate lock so any delays would have been more of a nuisance to me than a real problem.
2.) Am I missing something?
The rate for the first five years is a reduced rate so the even if bond interest rates do not change in five years when it resets in five years then your rate will go up to 3.75% so getting the maximum rate increase in five years is pretty likely.

Be sure to check on what happens to the minimum required monthly payment when loan is reset every five years. I would assume that it will recalculated over the full 30 years which could be to your advantage if interest rates go up a lot and you don't want to pay off the loan so early.

One thing that I did feel a bit odd about the loan though is that the index interest rate that they use to set the loan is sort of a vague "current index" and they reserve the right to change what index they use. If you dig through the fine print you can find the current details but it seems to be something that they can change if they want to.
thomasbayarea
Posts: 393
Joined: Wed Feb 29, 2012 3:40 pm

Re: Refi into Pen Fed 5/5 ARM

Post by thomasbayarea »

Watty wrote:One thing that I did feel a bit odd about the loan though is that the index interest rate that they use to set the loan is sort of a vague "current index" and they reserve the right to change what index they use. If you dig through the fine print you can find the current details but it seems to be something that they can change if they want to.
They use the Five-Year Treasury Constant Maturity as the index + margin.

http://www.bankrate.com/rates/interest- ... -bill.aspx
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