Anything to do before ARM adjusts? [2017 Update: Reconveyance]

[harikaried]

Edit: Updated in 2017 in a reply below. tl;dr: $0 balance on mortgage… update #2 and reconveyance recorded!

We recently passed the within-45-days-of-Change-Date mark, so we received a letter saying the rate will change for the first time for our 3/1 ARM from 2.625% to 3.875% on December 1. From my reading of the Note, it looks like the amortization will happen with the new rate based on 1-yr LIBOR on October 17 and the principal balance for December's statement for first new payment in January.

Using the PMT spreadsheet formula, if we prepay enough so that after the payment due for December the principal results in $10,034.93, the new amortized monthly payment should then be $49.99:

Code: Select all

=PMT(3.875/100/12, 27*12, -10034.93)

(This is mostly for personal entertainment purposes. FYI, I've put extra principal towards the mortgage so that the interest paid for the next month would be $99.9949 or $98.7649. With rounding, we save on half a penny of interest! And it's a "nice" number.)

But more seriously, anything else we should consider to do before the new rate payment due January? Potentially some benefits for taxes or paperwork to get things paid off in December?

[MathWizard]

Refinace to a fixed rate to avoid further rate increases?

[avalpert]

Refinace to a fixed rate to avoid further rate increases?

Or refinance to another ARM at a lower rate - you can look at SoFi, if you qualify their 7 year ARMs are at 2.875.

[sls239]

If you have an escrow account, you will want to review that. And if property taxes are due at the end of the year, you'll want to make sure you know who is paying them.

[harikaried]

Refinace to a fixed rate to avoid further rate increases?

Or refinance to another ARM at a lower rate

Actually, these comments made me realize we have an unused 5/5 HELOC with PenFed that has a slightly lower rate (Prime Rate) than the adjusted new rate of the ARM. The remaining principal is within the HELOC's $50k available credit line, and we would have it paid off before the HELOC adjusts. I would think a balance under $50k is not attractive for lenders to do a refinance.

I wonder if this is a useful strategy for people to work around adjusting rates without needing to do a full refinance? Setting up the HELOC a couple years ago was no cost with very little effort; it was created as a back-up emergency fund.

Is there much rate arbitrage potential where a couple years before an ARM would adjust, open up a HELOC that is higher than the initial ARM rate but likely to be lower than the adjusted rate?

In the "worst" ARM rate adjustment case and the "best" HELOC case, our ARM could have adjusted from 2.625% to 4.625% next month, 6.625% the year after, and 8.625% the year after that; whereas our HELOC would have stayed at 3.75% for the next 3 years.

[harikaried]

If you have an escrow account, you will want to review that.

We don't have an escrow account, but is this something that would change when the rate adjusts? I would assume if one did have an escrow account, the new monthly payments would have an unchanged insurance/tax escrow payment on top of the new rate's monthly payment. And the escrow account would make payments for insurance and property tax as usual.

[avalpert]

Is there much rate arbitrage potential where a couple years before an ARM would adjust, open up a HELOC that is higher than the initial ARM rate but likely to be lower than the adjusted rate?

In the "worst" ARM rate adjustment case and the "best" HELOC case, our ARM could have adjusted from 2.625% to 4.625% next month, 6.625% the year after, and 8.625% the year after that; whereas our HELOC would have stayed at 3.75% for the next 3 years.

I wouldn't think of it as 'rate arbitrage' because the opportunity to make money on it consistently shouldn't exist - but it might be a viable low-cost hedging strategy.

[avalpert]

If you have an escrow account, you will want to review that.

We don't have an escrow account, but is this something that would change when the rate adjusts? I would assume if one did have an escrow account, the new monthly payments would have an unchanged insurance/tax escrow payment on top of the new rate's monthly payment. And the escrow account would make payments for insurance and property tax as usual.

It shouldn't change with a rate adjustment - only if you switch lenders.

[harikaried]

it might be a viable low-cost hedging strategy.

This got me wondering if there are other cheap ways to get a loan or line of credit to finish off a small balance mortgage. I'm pretty sure PenFed used to allow cash out refinancing/recasting of their auto loans, so potentially one would effectively consolidate the home mortgage and car loan into a single loan at 0.99% for 36 months. Potentially also credit cards with 0% rate and no-fee balance transfer could be doable, but those 0% rates are usually only for 12-18 months and probably not that high of a credit limit.

[sls239]

Oh I just got confused. I thought you were considering paying it off in December.

[harikaried]

2017 update tl;dr: $0 balance on mortgage!

Turns out paying down principal before the new statement with new interest rate does not cause the payment to be amortized with the just-paid-down principal. The monthly payment was calculated with the remaining principal at the time the new interest rate was determined, i.e., 45-days before the change date. So we did not end up with a $49.99/mo mortgage payment. For those looking to pick a desired monthly mortgage payment when an ARM adjusts, you'll need to plan 45 days in advance with some prediction of where interest rates will be.

Instead in December, we paid down enough principal so that the next automatic monthly payment on New Year's Day with the new 3.875% interest rate would exactly pay off the loan. This resulted in 69¢ in interest to be paid at 3.875% instead of the original 2.625% ARM rate (which would have been 47¢ in interest, so we paid an extra 22¢ in interest because of the adjusted higher rate).

Unfortunately, because we paid down the principal so much, the direct debit on our account was automatically cancelled. I only noticed on the 4th as we figured the New Year's holiday and weekend would delay the payment, but it was the 2nd business day after and still no activity. I called the servicer to confirm that there was no direct debit set up anymore and made a manual payment of the monthly payment amount. The next day we received a paper mail saying the direct debit was cancelled due to low balance.

So today, the manual processing of the payment showed an additional 4 days of interest was charged because our payoff payment was made on the 4th instead of the 1st even though a normal monthly mortgage payment would have had a grace period of accepting a monthly payment in the first half of the month without a late fee while still counting as being paid on the 1st. It looks like the servicer was kind enough to adjust the account removing the 9¢ in extra interest from the delayed payoff. Overall, we paid a little bit over $8k in interest while Zillow estimated value growth is more than 16x of that interest.

Now we wait for confirmation of a mortgage paid off! (Where I assume we'll need to manually file with the county's recorder office and pay that recording fee.)

[harikaried]

2017 update 2 tl;dr: reconveyance recorded!

I guess one last update regarding our mortgage is that our county's online recorder public document search finally shows both a Substitution of Trustee as well as a Full Reconveyance as of 2017/02/06. One oddity is that these documents were separately handled where most payoffs result in a single "Substitution of Trustee and Full Reconveyance" document. The recorder charged $36 total, so $18 for each of the two-page documents ($17 standard document fee + $1 additional page fee), but if the lender used the single-page combined compact document, it could have only cost $20 for a multi-title document recording fee.

I suppose good thing we just paid off the balance with a regular final payment instead of requesting a payoff, where this (at least as of today) allowed us to avoid paying extra fees (my estimates) such as the Payoff Statement Fee ($30), Recording Fee ($36), Reconveyance Fee ($45), Fax Fee ($25), and Wire Fee ($15).

Time to celebrate!