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Trying to understand basics of refinancing

Posted: Tue Aug 13, 2019 4:05 pm
by morpheus1958
I am a novice and trying to understand/evaluate if I should refinance my home loan and what parameters should I consider when refinancing.

To give some background:
I bought this house about 2.5 years ago with 7/1 ARM loan.
We like the house and do not see selling it for next 5 to 10 years atleast. I am not sure if would be my retirement house as it is in HCOL area.

My questions:
While refinancing, should my goal be:
1) to minimize the total amount that I shell out to bank ( so going for a shorter loan period)?
2) to eliminate the uncertainty of new interest rate after my 7/1 ARM period is over?
3) to minimize the monthly payment so I can invest more in 3 fund portfolio?
4) Also, regarding closing cost and points, I could not understand why agents bring this into consideration. For ease of calculation, should I compare only 0-point, 0-cost options, so I can easily compare numbers for 2 loans side-by-side.
5) Generally trying to understand, Fed has been raising interest rate for last 10 years now ( except the last month). Then why does news say that interest rates are lowest. Shouldn't it be highest over the last 10 year period?

Details about my loan:
Loan date: March 2017
Loan amount : 640K ( as of today)
Interest rate: 3.125%
Loan type: 7/1 ARM
Term in years: 30


I was trying to look for wiki page for this, but couldn't find any.
I looked at few previous threads on refinancing topic, but I got lost in terminology (like what is break-even point?)

Thanks for your time reading this post and would appreciate your thoughts and insights.

Have a nice day.

Re: Trying to understand basics of refinancing

Posted: Tue Aug 13, 2019 4:22 pm
by HomeStretch
Doesn’t hurt to shop rates for any of those reasons.

Interest rates for home mortgages are currently fairly low. You didn’t mention your rate. But if I was 2-1/2 years into a 7/1 ARM and planned to stay 5-10 more years, I would strongly consider locking into a 15 or 30-year fixed rate.

My 30-year mortgage rate was 10% in the 90’s. Friends with ARMs were losing their homes/condos in late 80s/early 90s as home values fell and their rates reset and increased by 2% per year for 2+ years in a row.

Re: Trying to understand basics of refinancing

Posted: Tue Aug 13, 2019 5:10 pm
by morpheus1958
Thanks HomeStrech.

My current rate is 3.125% (7/1, 30 years)

Re: Trying to understand basics of refinancing

Posted: Tue Aug 13, 2019 5:21 pm
by Northern Flicker
If you would sell in 5 years, just stick with the 7-year guaranteed rate ARM. If you might stay 10 more years, you could investigate a refi. Ask the lender for an interest rate for a 30-year fixed where closing costs, including appraisal fee are zero. Then you can compare that rate to your current rate to see if you should refi.

If the above rate is lower than your current rate, it is reasonable to refi. Then you can decide on term of loan and how much APR to pay in up front closing cost based on your best estimate of how long you will be in the house.

Re: Trying to understand basics of refinancing

Posted: Tue Aug 13, 2019 5:33 pm
by megabad
morpheus1958 wrote:
Tue Aug 13, 2019 4:05 pm
I am a novice and trying to understand/evaluate if I should refinance my home loan and what parameters should I consider when refinancing.

To give some background:
I bought this house about 2.5 years ago with 7/1 ARM loan.
We like the house and do not see selling it for next 5 to 10 years atleast. I am not sure if would be my retirement house as it is in HCOL area.

My questions:
While refinancing, should my goal be:
1) to minimize the total amount that I shell out to bank ( so going for a shorter loan period)?
Maybe, can you afford much higher payments when you shorten the ammortization period from 30 years? Does this reduced cashflow cause other problems (can't max retirement accounts)? It depends.
2) to eliminate the uncertainty of new interest rate after my 7/1 ARM period is over?
In my opinion, if you are in the US, you should have a long term conventional fixed rate mortgage as government support makes the rates so attractive. So this is a good reason, but maybe not so much if you are going to sell the house before your fixed rate period is up on the ARM.
3) to minimize the monthly payment so I can invest more in 3 fund portfolio?
Depends. Is this portfolio tax advantaged? What do you predict the portfolio return to be?
4) Also, regarding closing cost and points, I could not understand why agents bring this into consideration. For ease of calculation, should I compare only 0-point, 0-cost options, so I can easily compare numbers for 2 loans side-by-side.
If you can find many lenders that want you to be able to compare like this than you are better than me. Usually the banks don't make this easy. The last bank I used had the worst 0 points interest rate, but the 0.25 rate was the best I could find anywhere by a landslide.
I look at everything when I get quotes.

5) Generally trying to understand, Fed has been raising interest rate for last 10 years now ( except the last month). Then why does news say that interest rates are lowest. Shouldn't it be highest over the last 10 year period?
Because long term mortgage rates are not necessarily instantly affected by the overnight Federal Funds rate. In the historical context, long term fixed mortgage rates have been basically flat for a decade and very very low during that period. Who knows if they will go lower or higher in the future, but I wouldn't feel bad doing a refi now.

I was trying to look for wiki page for this, but couldn't find any.
I looked at few previous threads on refinancing topic, but I got lost in terminology (like what is break-even point?)
Most people define break even point as how long you have to hold that mortgage that you refi until the closing costs are paid back in terms of difference between the prior mortgage and new mortgage payments. This is always ambiguous though because a fair comparison would also include consideration of extending the loan term (which almost all borrowers do).

Re: Trying to understand basics of refinancing

Posted: Tue Aug 13, 2019 7:01 pm
by delamer
Have you figured out what your balance will be if you still own the house (and rates reset) when the 7 years are up?