ARM Mortgage Payment Adjusting in May

[ClockerXP]

I'm in 3.75% 3-year ARM. It's due to adjust up in May a max of 2%.
Whatever the adjustment is, the payment won't be a problem. I'm just
curious, is the new payment based on the remaining balance of the loan
or the original principal balance?

Let's say the original loan was $100,000 and my balance at the time of
adjustment is $85,000. Will the new payment at the time of adjustment
be based on 27 years (30-3), plus the new interest rate (assume 5.75%) and the
NEW principal ($85,000)? If so, I would not mind paying down the
principal a little before the rate adjustment and re-amortization.


Thanks,
CxP

 

[Britboy]

The mortgage company should be able to give you all the details on how it is calculated

 

[FelixDeCat]

Assuming your paying principal and interest (P&I), your new payment will be based on

1) Your new rate

2) Your remaining loan balance as of the Change Date

3) Your remaining loan term as of the Change Date, 324 months


If your payment is interest only, its your new rate x unaid balance /12 months +escrow

 

[ClockerXP]

Brit-
Brilliant! I was looking for feedback here as I'm fairly certain there are standard ways in which ARMs are handled.


Thanks Felix...

 

[dullard]

The interest they charge is based on the CURRENT balance. Thus, if you pay more in a given month, they charge you less interest for the life of the loan (you get savings each and every month for the next 27 years).

For example, if you have the money now, and if it is earning you less than 3.75%, then you can pay it now and save money at 3.75% now and up to 5.75% starting in May. But, if you are willing to do the work, you can probably earn more than 3.75% with the money now.

 

[ClockerXP]

Thanks again. I'll probably just drop a bunch of cash on the mortgage just before the rate adjusts so I can lower the principal before I jump into a 15-year fixed.

Appreciate the feedback!

CxP

 

[Thorny]

If your only going up to 5.75 it won't be worth your while to refinance yet. Check and see when your next adjustment would be and how much it will be. I believe most ARMs have a higher first time adjustment and then lower after that.

 

[FelixDeCat]

Originally posted by: Thorny
If your only going up to 5.75 it won't be worth your while to refinance yet. Check and see when your next adjustment would be and how much it will be. I believe most ARMs have a higher first time adjustment and then lower after that.

Assuming the index on which the ARM is based is relatively stable over the two adjustment periods, it may actually take TWO changes for the rate to "level out".

Example:

The One Year LIBOR and One Year Treasury Security are both running about 5%. Add the typical "margin" of 2.75% and you have 7.75%. If he is only going up to to 5.75%, it is only because his rate was capped @ 2%. It will take one more year to level out, assuming he has annual adjustments.

I perform rate changes on ARM loans, among other things.

 

[Thorny]

Originally posted by: FelixDeKat

Originally posted by: Thorny
If your only going up to 5.75 it won't be worth your while to refinance yet. Check and see when your next adjustment would be and how much it will be. I believe most ARMs have a higher first time adjustment and then lower after that.

Assuming the index on which the ARM is based is relatively stable over the two adjustment periods, it may actually take TWO changes for the rate to "level out".

Example:

The One Year LIBOR and One Year Treasury Security are both running about 5%. Add the typical "margin" of 2.75% and you have 7.75%. If he is only going up to to 5.75%, it is only because his rate was capped @ 2%. It will take one more year to level out, assuming he has annual adjustments.

I perform rate changes on ARM loans, among other things.

Yeah, I was getting at the fact that there's no way he would be able to refinance at 5.75 now anyway. I was thinking the "standard" was 2% on the initial change, then .5% every six months with a maximum of 5 or 6 percent total change. If his terms are anything close to that, it wouldn't be worth while for him to refinance for another year maybe two, and by then rates will likely be lower anyway.

Oh, and you don't want to pay the principal down now either. If you have the money, pay off higher interest debt first. Don't pay off debt that cheap until you have too, you could make money with a 5.25% 6 month CD with the money and have it back in time to pay your debt down if you don't have more expensive debt to pay first.

 

[FelixDeCat]

Originally posted by: Thorny

Originally posted by: FelixDeKat

Originally posted by: Thorny
If your only going up to 5.75 it won't be worth your while to refinance yet. Check and see when your next adjustment would be and how much it will be. I believe most ARMs have a higher first time adjustment and then lower after that.

Assuming the index on which the ARM is based is relatively stable over the two adjustment periods, it may actually take TWO changes for the rate to "level out".

Example:

The One Year LIBOR and One Year Treasury Security are both running about 5%. Add the typical "margin" of 2.75% and you have 7.75%. If he is only going up to to 5.75%, it is only because his rate was capped @ 2%. It will take one more year to level out, assuming he has annual adjustments.

I perform rate changes on ARM loans, among other things.

Yeah, I was getting at the fact that there's no way he would be able to refinance at 5.75 now anyway. I was thinking the "standard" was 2% on the initial change, then .5% every six months with a maximum of 5 or 6 percent total change. If his terms are anything close to that, it wouldn't be worth while for him to refinance for another year maybe two, and by then rates will likely be lower anyway.

Oh, and you don't want to pay the principal down now either. If you have the money, pay off higher interest debt first. Don't pay off debt that cheap until you have too, you could make money with a 5.25% 6 month CD with the money and have it back in time to pay your debt down if you don't have more expensive debt to pay first.

You CAN get 5.75% if you want to buy the rate down. Typically it takes about 2-4 years to recoup the cost of refinancing vs. paying a higher rate. The 5.25 is only good for 12 months. If he plans to stay there at least 5-6 years, he will come out ahead by paying the extra points for the lower rate.

Putting the money in a 5.25% CD will involve paying uncle sam. So I would say instead of doing that OR paying down principal, buy the cheap rate mortgage money now and make it the LAST debt you repay. At least you wont have to worry about rates anymore. If you have no debts left but the mortgage, I would look at a REITS paying 10%+, which would offset a tax setback enough to make it worthwhile.

 

[ClockerXP]

Thanks all.

My mortgage can adjust up 2% per year up to a max. of about 8%, IIRC.

I have no debt but my mortgage. I can earn an easy 6% in my GMAC Demand Notes, but as noted, I have to pay taxes on that. So my real rate of return there is only about 4.2%. The difference between that and the real interest I will be paying on ~6% mortgage is so small that I think the peace of mind of paying down the mortgage before refinancing is worth it. Plus I think a 15-year mortgage will get me an even nicer rate. A nice small (<$800) mortgage payment on a 15-year loan will mean my wife can quit working if she wants to sometime down the road, we'll pay a lot less interest, and we can retire earlier.

BTW, we are already maxing out our two 401(k)'s and Roth IRAs and I have a nice amount of cash in stocks that I play with as my risk $.

 

[ClockerXP]

I'm thinking rates will be headed down toward the end of the year....maybe I'll get a nice rate at that time... ??

 

[dmw16]

i wish i could find a place to live and have an $800/month mortgage. My rent is almost twice that