Should I refinance or wait?

I bought my condo in July 06 with a fixed rate-adjustable hybrid. My interest will be locked at a fairly good rate until 2010, and then the scary balloon payments will kick in.

I was listening to NPR this morning and Diane Rheme was interviewing real estate experts. They all seemed to cast doom and gloom on people with ARMs, and their talk has got me feeling stressed now. Everytime the Fed bumps up the interest rate, I fret.

Pros to refinancing to a 30 year fixed: I won’t have to worry about rising interest. I won’t have to worry about the balloon payment boogeyman. Things will be predictable. This means peace of mind.

Cons to refinancing: My monthly payment will be significantly higher than it is now, and it’ll be a strain on me. Especially since I might be renting this bad boy out several months from now and I don’t know how high I’ll be able to set my rent.

What do you think I should do? How likely is it that the interest rates will plateau for a while, if not perhaps go down? What other things should I be considering when I make my choice? I’m not planning on selling anytime in the immediate future, but it’s quite possible I’ll decide to sell before 2010, especially if the market picks up.

I mean, July 05.

I made the rare financial mistake and didn’t realize that our mortgage was about to balloon after the first five years. Our craptacular former bank sent a nice letter saying the interest rate was going to be 1.5 points higher and the payment several hundred dollars a month more after 60 days. I had to refinance right away and switched to Bank of America and was surprised to find out that we seemed to have a temporary dip and got the exact same rate as my adjustable was before. That was 2 months ago.

DO NOT believe anyone when they try to predict interest rates long-term. It can’t be done with any accuracy. However, rates are still in the historically low-range right now so there is more room for them to move up long-term than there is done. If they go up for a long while to say 8% or more, you will be stuck and it will cost you dearly. I would say play it safe and just take the rather reasonable rates that are offered now. It will cost you to refinance but you could role the costs into the mortgage if you don’t have 2 - 4k on hand.

What kind of financial position can you expect to be in in 2010?

Even if rates go up between now and then, you might be better able to handle them than if you go to a fixed rate right now?

If my life continues on its current trajectory, then I should be in a better position to handle a fixed rate 4 years from now, but I don’t know how high my interest rate could go for that to be the case. So it looks like I have some homework to do.

Good point Trunk I would add

“interest will be locked at a fairly good rate until 2010, and then the scary balloon payments will kick in.”

Rhetorical to you with the face What is “fairly good”? What exactly is the scary balloon? You could probably work out scenarios:

**<**I will be (hopefully but realistically) be making X amount in 2010. My Mortgage will be X

**<**If I refinance now it will cost me X between now and 2010

Which scenario is more likely to put you ahead?

The wild card is the rent plan - but you should be able to gauge rents fairly easily -that indeed may be the critical factor to your refinance plan.

(takes off planning hat puts on advice giving one)So having said all that:
Really it sounds like you signed up for the ARM with the idea you could swing the balloons in 2010 if you had to. The only disaster would be if you re-financed and had to rent it out and your rent doesn’t cover refinanced costs.
If that is right, I rhetorically ask you again to you with the face What is “fairly good”? What exactly is the scary balloon?

I actually have 80/20 loans. The interest on the 20 loan is 7.5% and the 80 loan is 5.6%. They’re both interest-only but I’ve been paying towards the principals so the interest-only thing is in name only.

So about the scary balloon part. I’m starting to think I was wrong about that now that I review my documents. The disclosure statements say that my monthly payment for my 20 loan is supposed to go up by just a small amount in 2010 until after which it won’t be scheduled to go up until 2015 (again by a relatively small amount). The scary time won’t actually happen until 2020. That’s when the remaining balance on my 80 loan is due. But I’m not about to lose sleep over that.

I’m confused by all this. Where does the “adjustable” part come into play here? Just by reading the disclosure statements without refering to any prior conversations with my lending officer, I have the impression that I don’t have anything major to worry about until 2020 and should expect to pay the same interest rates on both loans until that time. But then why would I have an ARM and not simply a fixed-rate mortgage, if that is the case?

I think I need to talk to my lending officer to figure out exactly all this means. It’s possible that he told me everything I need to know last July, but listening to Diane Rheme and her crazy voice messed my head up.

Nah, that wasn’t it. When I bought the condo last year, I was absolutely positive that I would be selling it before 2010. I told myself that it would just be an investment property and that was it. Live in it in a couple years and then get out. And then I fell in love with it. And the market shifted to favor buyers, too. So now I’m not in a real rush to get rid of it. The only reason why renting it out is a prospect is because I may be starting a 2-year fellowship program next year that will entail moving far away.

Yeah you should probably have your lending officer talk - that should all be transparent.

I still think the only way you run into near time disaster is if * you refinance and you get the fellow-ship - if* you could have swung the payments by rent but now can’t with the refi … the rest sounds like you can figure it out based on numbers

The other factor to consider is how long you intend to own the place. Supposedly the average American moves every 7 years. Paying extra for a fixed-rate to protect you from interest rates in the out-years is pointless IF you are all-but certain to have sold the house before the out-years happen.

I’m 4 years into a 30-year fixed on a house I’ll probably own for another 15-20 years. If I end up selling next year due to some career change I’ll have made the wrong loan decision back in '02. But if I’m still here in 2020 I’m confident the fixed will have turned out to be the right answer over the long haul.