Should I refinance now?

August 7, 2007 12:02 PM

Should I refinance now, or wait until my 5-year ARM "expires"? More details inside.

Here's my situation: 2.5 years ago, I had a 6.5% 30-yr fixed mortgage. I was having a difficult time making my mortgage payments, and I was planning on moving in less than 5 years so I got a 5/1 ARM at 4.5%. This saved me just enough per month to be able to afford to keep the house. So, I have 2.5 years left at this rate. Then I'll have to refinance - if I still live in my current house.

Part of the problem is that I really can't afford to move at this point. My hopes of moving have been dwindling because I really can't afford to move anywhere.

So, here's what I see as my options:
1) I could refinance today to a 30-year fixed (at what seems close to 6.375%).
2) I could wait until my 5-year ARM "expires" and refinance then. This would be in December 2009.

There are problems with both options as far as I can see:
1) This would cost me almost $200 more per month. That's $200 that I could hardly afford to pay. It would really tough. So, I would struggle and pay an extra $5000 between now and December 2009. What if I end up moving in a year? Then I've paid a couple of thousand dollars for nothing, since I'll have a new mortgage anyway. What if I take #2 option, and the interest rates are around 6.5% anyway? I would have refinanced to a higher rate for absolutely nothing.
2) If I wait, couldn't the interest rate for 30-year fixed mortgages be crazy? Anything higher than 6.5% or so, I wouldn't be able to afford the payments.

I'm struggling here. I really don't know what to do. I was struggling a few months ago when 30-year fixed mortgages were much lower. Now I feel like I completely screwed up.
help. thanks

posted by tom_g to work & money (30 comments total)

Hedge your bets and sign up for a 15-year ARM. Not as much pay per month as a 30 year.
posted by StarForce5 at 12:08 PM on August 7, 2007

Right now the markets are crazy, if it's a jumbo loan >500k then you are already looking at 8%. I'd stick with what you have if moving is a possibility. A lot can happen in two years so I'd stay put; it's looking like the fed is going to cut rates before the end of the year which might help some. I'm in a similar spot only on a shorter timeframe....
posted by zeoslap at 12:11 PM on August 7, 2007

Not sure if it makes any difference but my mortgage is < $200k (don't laugh, it's still a challenge as we only have one income)
posted by tom_g at 12:14 PM on August 7, 2007

Another option is to sell, then rent for a while...
posted by zeoslap at 12:22 PM on August 7, 2007

Then I've paid a couple of thousand dollars for nothing, since I'll have a new mortgage anyway.

that is really not your main concern here. not losing the house is. you are one hospital stay away from financial destruction. not good. the fact that you do not have the means to cover two months payments if you lost your job should indicate to you that you are already living on the edge. considering what is happening to home owners all around you, this is bordering on being irresponsible.

the arm is a huge unknown here. I would refinance into a fixed rate. you will at least know what to expect and you can begin thinking about selling the house without being under pressure and desperate like so many of your peers in this market. yes, I would argue you should eventually get out. you are absolutely living beyond your means if you don't have at least a small safety net. this is exactly how people get burned.

see if you can sell it over the next twelve months without taking a massive financial hit and make sure that before you buy again you have 10k in a high-interest savings account for rainy days. you need this emergency fund to be totally cut off for anything else. then begin looking around. if you cannot get out, sit this market out and stay put with your fixed rate. take a weekend job on the side to make a few hundred bucks per month extra.
posted by krautland at 12:32 PM on August 7, 2007

Unless your credit is very good, you will have a hard time refinancing to anything, right now.

I would take the 30 year @ whatever now and pick up a part-time job to pick up the slack for a few years. Interest rates are going nowhere but up.

Depending upon how long you've had your house, you could be "upside-down", meaning that you cannot refinance the entire amount. If this is the case, you'll need that second job just to amass enough to cover the margin when you are forced to refi when your ARM resets.
posted by unixrat at 12:47 PM on August 7, 2007

Also, the single-income household you're living in may become a fond memory. If you are as close to ruin as you claim, you'll need that second income ASAP.
posted by unixrat at 12:49 PM on August 7, 2007

Why would you advise him to refi now when the fed will most likely drop rates (at least the market thinks so) towards the end of the year?
posted by zeoslap at 12:56 PM on August 7, 2007

Why would you advise him to refi now when the fed will most likely drop rates (at least the market thinks so) towards the end of the year?

Two reasons:

1. There's no way the Fed is going to drop rates.
2. His house price will take a hit, which could be anywhere from 10-30%. If this leaves him upside-down, he'll be in a much worse position.
posted by unixrat at 1:08 PM on August 7, 2007

You'll know your situation better than most, but if I were in your shoes I'd be looking for assured stability.

Regardless, you have 2.5 more years on the 5/1 arm. You're not under extreme pressure to get locked in anywhere right now, in a year I'd start thinking about it very carefully.

You need to adopt a strategy where you can build up some breathing room. The biggest problem you have right now, if I understand things correctly, is that you have no financial free space to make decisions.

This gives you two options really, build up cash without incurring more debt, or sell the property. If you're as close as you sound to the debt wall you may want to consider selling now rather than holding on to the property. Even if you break even on it you can likely rent a place for less than your mortgage and build is a solid cash basis to buy another place, and at the end of the day you are in a better potion to deal with unforseen life evemts.
posted by iamabot at 1:08 PM on August 7, 2007

Okay after the last Fed statement an imminent drop in rates is looking less likely but he still has 2.5 years to go. Selling and renting isn't a bad option but he has two kids to think about so that is quite a proposition in and of itself... How about you ask your boss for a raise and if you get it refi asap.
posted by zeoslap at 1:17 PM on August 7, 2007

Keep the ARM but take the extra $200/month you would have been paying on a fixed-rate loan, and set it aside for future house payments.

I would not try to refinance now. The markets are in too much flux and the mortgage companies are in the process of (over-)compensating for their lax lending habits. 2.5 years is a very long time, and there is a good chance the market will be more stable by then, and more rational as a result.

If the fixed interest rates are higher in 2 or 2.5 years than they are now, you will have an extra $2,400 in the back to help you deal, at least for a little while.

In the meantime, you can keep your eyes open for opportunities to sell.
posted by alms at 1:20 PM on August 7, 2007

ARM is adjustable - hence if it does adjust up, can you still make the payments?

If not, move into a fixed rate. I personally feel it is that simple as you gain stability and won't have a surprise rate adjustment. Someone above mentioned the 15 year, which could provide a nice compromise.

After you research your options, it might be worth talking with your bank. Layout your options - when I recently purchased our home, while still owning my condo they surprised me with a deal that saved me some real money on refinancing charges.

Again, I would suggest you do your homework first and then speak to them. If there are no options or specials then you know to move into a fixed rate. I come from a basis of liking stability = not a huge risk taker on some things - hence my two cents.
posted by fluffycreature at 1:21 PM on August 7, 2007

I second alms' advice: don't refinance now (for precisely the reasons he says: the markets are haywire right now, and you have a couple of years before crunch-time), put aside the $200/month (this is ESSENTIAL), and look for opportunities to sell.

You need to adopt a strategy where you can build up some breathing room. The biggest problem you have right now, if I understand things correctly, is that you have no financial free space to make decisions.

That sounds like the broader problem to me, too. In the long run, if your expenses are too high in proportion to your income, there are really only two choices: decrease expenses or increase income. That's it.

I've found All Your Worth to be incredibly useful in crafting a strategy for financial well-being without resorting to saving every receipt for every cup of coffee. The crucial part of it is forcing you to evaluate your must-have essentials. Yes, you need a home and transportation, but if you're spending too much for this home or that car, then you'll have to make some tough choices to get out of the crunch and start creating some actual financial security by getting out of debt, getting a cushion of savings, and having some spare funds for the things you enjoy.

The 60% solution is also a useful article that can help you think about ways to start structuring your spending to help you out of the struggles you're currently in.

Also, if you're carrying a lot of non-mortgage debt as well, you need to be as aggressive as possible in paying that down simultaneously. The book I linked to has a whole chapter devoted to strategies to accomplish that.

And finally, as others have made reference to: you and your spouse may have agreed to be a one-income family, but if things are really as tight as you say, you probably need to reevaluate that decision in light of your current circumstances.
posted by scody at 1:57 PM on August 7, 2007 [1 favorite]

Look at your mortgage documentation. You should have copies of everything you signed at the closing. It will tell you how much your ARM is going to go up at reset date (the date your rate changes for the first time), how much it can go up and at what frequency after that and where it caps out. See if you can figure out what the rate will be when it first resets and if you can afford that.

This site may help you work your way through the paperwork. I know it's gut wrenching right now, I know, but understand your loan and ask questions of your lender if you don't understand.
posted by jerseygirl at 2:05 PM on August 7, 2007

great suggestions everyone. If it helps, I'm in Massachusetts, and I live out in the middle of nowhere because it's impossible to afford anything within an hour of Boston.

Also, renting anything *anywhere* is more expensive than my current mortgage *and* more expensive than my mortgage would be if I refinance now.
posted by tom_g at 2:15 PM on August 7, 2007

Also, I know it sounds crazy to be on one income, but we only have about 4 or 5 more years before my wife earns again. And yes, I have 2 kids.
posted by tom_g at 2:17 PM on August 7, 2007

I agree that you sit tight with the ARM -- as long as you have it, you're saving money until the adjustment date comes.

Assuming the hit at that time looks to be substantial, you need to put your energy into an overhaul of your financial situation. Just putting the $200 a month is not enough, I suspect. Do a three or four year month-by-month budget. Live by it. Aim to eliminate all debt outside of the mortgage by the end of that time. Cut up credit cards, and all that. Chop your expenses. (Credit counselors usually find they can save people enough money to bail them out by looking at all the little stuff, not the big stuff. Eliminate the premium cable channels, find energy savings, trade the SUV for a Focus, pack a brown bag for lunch, etc., etc.) If you can save money by selling and renting, do it. If you are upside down on the mortgage, consider negotiating an exit strategy with the lender (who is also upside down). And, what scody said.
posted by beagle at 2:19 PM on August 7, 2007

Regarding your comment on location: if you have a really long commute by car, start thinking about housing plus transportation cost as one monthly nut, and see if there is a way to restructure that more cheaply. First figure out what your real cost per mile is to operate your car(s), including depreciation (but not including car payments). In my case, it's around $.38 per mile, and I think of every trip I take in terms of that cost (not, "it's just a 20 mile trip, less than a gallon of gas", but 20 x .38 = $7.60). The point is, you might find you can live with one car rather than two, for example, if you can move to a place from which you can take public transportation.

If you 've already figured all that out, forgive me. I just find it hard to believe there's not a cheaper living/commuting option to be found in the whole Boston area.
posted by beagle at 2:29 PM on August 7, 2007

I know it sounds crazy to be on one income, but we only have about 4 or 5 more years before my wife earns again. And yes, I have 2 kids.

I don't mean to be harsh, but I think it's important to be blunt: yes, it's crazy. Unless you immediately lower your expenses dramatically, there's no "only" to waiting half a decade (60 more mortgage payments!) for a second income, given how close to the edge you say you are. As someone else said above, at this rate, you are one medical emergency or layoff away from disaster. Forgive me, but I honestly can't understand why you and your wife would willingly stay in that position for another 4 or 5 years.

Of course, there's a massive Catch-22 here: if your wife works outside the home, you'll need to pay for daycare for your kids, which can drain away a signficant chunk of what she earns in the first place. But what if she works at home? There are legitimate work-at-home jobs for a variety of skills -- for example, medical or legal transcribing, proofreading, etc. Or what if she works part-time outside the home a few evenings a week when you can be at home with the kids? Honestly, think of the breathing room you'd start to have if she could bring in even an extra $100-150/week.

As for reducing expenses: if you have two cars, can you get by with one? If you're paying off one (or more) big car loans, can you sell the car(s) without taking a loss and get into something more affordable? If you have student loans, can you put them into forbearance or refinance them? If you have cable, cancel it. Transfer onto the most affordable cellular and internet service you can find. Can you find a better deal on car insurance? Can you cancel that gym membership and just go running instead? And whatever you do, STOP using your credit cards, if you haven't already. When it comes to getting out of a hole, the first rule is to stop digging.

As for alternate sources of income, you might consider (if you have the room) taking in a boarder. I know it sounds extreme, but a friend of mine did that for a while when she was going through her divorce, and it made the difference between keeping her house and losing it.

I know none of this sounds terribly easy or enjoyable. But the rewards of generating more security for yourself and your family will be immense. Good luck!
posted by scody at 3:16 PM on August 7, 2007

To all who say that it's hard to believe there isn't cheaper living/commuting option to be found in the whole Boston area - I suppose there is. However, you have to realize that MA/Boston is not like other parts of the country, period. I don't make too much under 6 figures, yet I can't afford (nor do I have) cable TV, gym membership, or other expenses. I live a relatively frugal existence in a 980 sq ft house - 38 miles from my work.
I'm not asking people to accept or respect my family's decision to have one parent home with the kids until they are in school. I'm asking specifics about mortgage rates - not a lecture in how to save a few bucks. All of our children's clothes and toys are second-hand.

Sure, I could move into a high-crime neighborhood a whole 5 miles closer to Boston (literally) and live in a 1-bedroom condo with 2 kids, but I don't think that's a reasonable option. I have the cheapest house within a 50-mile radius of Boston.

I'm looking for info on what the interest rates might be in 2009. I know nobody can predict the future. However, I've been unable to find a single website charting trends in interest rates, so as far as I'm concerned, I'm completely blind on how much they fluctuate. I'm confused, sure. In over my head, sure. Living beyond my means, sure. Ready for a lecture on how to raise a family, not really.
posted by tom_g at 3:45 PM on August 7, 2007

None of this was meant as a lecture, and I apologize if it came off that way. I'm actually trying to be in your corner here, tom.

When you're as far over your head as you are, predictions about future interest rates aren't going to get you onto dry land. I and others are trying to offer more substantial lifelines to get your finances in balance overall. You may, of course, ignore the answers you don't like as you see fit, but it doesn't actually make them bad answers to the essential issues underlying your question.

Here's a table showing the history of interest rates. Rates were as high as 20% in the early '80s, and as low as 4% in 2003. What that says about the rate in 2009 is anyone's guess. Again: good luck.
posted by scody at 4:04 PM on August 7, 2007

Oh, and here's a whole host of graphs showing the history of interest rates. Here's the historical info on 30-year fixed mortgages since the early '80s. Here's another graph on mortgages, going back to the early '70s.
posted by scody at 4:14 PM on August 7, 2007

thanks, scody. sorry for the snippy response. A bit on edge here, as you can probably tell. Thanks for your response though, seriously.
posted by tom_g at 4:20 PM on August 7, 2007

Sure, no worries. I know the situation must feel jittery. Here's a few more things I've found: this charts mortgage rates and points for every month going back to 1971. Also, you might find this blog about the Mass housing market useful.
posted by scody at 4:41 PM on August 7, 2007

Nobody knows what interest rates will be in 2 years and anyone who tries to say they do is just guessing -- not even Ben Bernanke, chairman of the Federal Reserve, who has kept the federal funds rate fixed for the last nine meetings, signaling that he doesn't know whether there is more likely to be inflation or recession.

What you can do is act on the information you have right now. You have a very good rate for the next 2.5 years and it would be foolish to give that up. If you check your mortgage contract you will probably find that the maximum increase is something like 2% per year. That means that the worst you will have after the first adjustment is a 6.5% rate, which is no worse than if you refinanced now. That means that for at least the next 3.5 years, you save money by not refinancing. That is getting very close to the time when you say that your wife can go back to work.
posted by JackFlash at 5:41 PM on August 7, 2007 [1 favorite]

There's another problem here that is separate from the "will rates go up or down" question. It's "will the value of my house be higher or lower in 2009" than it was when you bought it. If you refinance, whether it's into an ARM or a fixed-rate, it can only be at the estimated value of your house in 2009, and that value will be set based on actual sale prices of similar houses in your neighborhood in 2009, not on their 2009 asking prices or their previously-sold-at-in-2004 prices.

Housing prices are starting to crash right now in many areas of the country, and will continue to go down as a flood of inventory (from bank-reposessed homes, short sales, etc.) hits the market in the next 24 months. I don't know what your particular area of the country is like, but if several of your neighbors are in trouble with their mortgages too, and they all decide to try selling to get out, or worse have the houses seized and sold by the banks, it will seriously negatively affect the value of your home. So if/when you go to get that refi in 2009, it will likely be for a lesser amount of money because the home will be worth much less.

I must agree with scody that you and your wife need to come up with some extra income, and fast, before the reset happens. The work-at-home option for her sounds good, or else she gets a part-time job on weekends while you watch the kids, or something like that. That money should be saved in preparation for the day the rate resets. In the meantime, do everything you can in the next two years to get both of your FICO credit scores as squeaky clean as possible, which will help you qualify for better loan rates in the future.

Finally, just my two cents here: I really think rates for all types of mortgages (fixed, jumbo, ARM) are going to go way, way up in the next five years. And some (sub-prime, Alt-A) are on the verge of disappearing right this minute. The changes in the mortgage market just since last week are incredible; a number of companies have gone bankrupt or stopped accepting new loans (AHM, NovaStar) and even the big name companies are now in serious trouble (Countrywide, WaMu, Wells Fargo, etc.). I highly recommend reading Ben Jones' Housing Bubble Blog for more information -- or, much more abrasively, HousingPanic.

Good luck to you, this sounds scary.
posted by Asparagirl at 5:47 PM on August 7, 2007

Why would you advise him to refi now when the fed will most likely drop rates

Mortgage rates going forward may very well not be as tightly coupled to Fed rates as they have been this decade, what with more conservative risk premiums starting to get mixed into the product.

I've been inhaling the various housing bubble and econo blogs for over a year now, and to be honest, while the present situation was expected, it is completely beyond my powers of analysis and projection.

^ what Asparagirl said above, too. The poster is in a population of millions facing similar doomsday with their suicide/timebomb mortgages. How the market and financial sector ultimately deals with this challenge remains to be seen, but so far the picture is far, far from encouraging.

As a basic rule of thumb, should present trends continue pricing should -- in the reasonably optimistic (for the poster's) case return to ca. 2001-2002 levels if/when we hit the low-end of the cycle. If the poster feels his balance owed on the house will be below this watermark when the time comes to refinance then he should stick with the ARM.

2+ years is pretty fast to hit the low, but 100+ lenders failing in 1H07 was also pretty fast.
posted by Heywood Mogroot at 6:42 PM on August 7, 2007

Assuming you have a smallish car, your 76-mile daily round trip is costing you, minimum, $7220 per year (assuming $.38 per mile total cost of owning a vehicle, depreciation, taxes, tires, repair, oil & lube, gasoline). $601 a month. Plus any tolls and parking. Do you carpool?
posted by beagle at 6:49 PM on August 7, 2007

What are the details of your ARM? Once the 5 years pass, how much per year can your rate climb?

Some ARMs (hopefully yours) can only go 1 point higher per year. If this is the case for you then after 2.5 more years your 4.5% rate could only climb to 5.5% for one year. This would give you 3.5 more years with a payment lower than if you refinanced right now for 6.325%

Make sense?
posted by mjger at 9:52 PM on August 7, 2007