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# Considering re-financing

November 28th, 2008 at 05:33 pm

My neighbor is a real estate agent, and a few days ago he emailed a bunch of his friends and clients to say that interest rates had just taken the biggest single-day drop he'd ever seen, and he thought it possible that conforming loans (< \$418k) might briefly go below 5%.

It sounded interesting, so I contacted the mortgage broker he recommended. She said that currently a 30-year fixed is 5.375, with closing costs of \$2k-\$3k. She asked me at what rate we would be interested in refinancing.

We are 5.5 years into an ARM loan that is fixed at 5.125 for 10 years, and then can only adjust 1% max per year. My first instinct was to go ahead and lock in at 5.375. Then I decided to play around with some mortgage calculators:

Payment calculator:
http://www.hughchou.org/calc/missing.cgi

Loan comparison:
http://www.hughchou.org/calc/loancomp.cgi

It turns out that at a fixed rate of 5.375, we'd pay an extra \$5,500 over the next 4.5 years (plus \$3k for closing costs), and then it would take another 3 years before we'd be better off than leaving the \$3k in a savings account earning 3%. (I assumed the adjustable rate stayed at 6.125). So it doesn't seem worth doing right now.

Of course, the story might be different if interest rates spike sharply 5 years from now, so that we ended up paying 6.125, then 7.125, then 8.125, etc.

I haven't played with this ARM calculator much yet, because I need to look up some of the details like which index we're using:

http://mortgage-x.com/calculators/pay_option_arm.asp

The worst I could do with the calculator was raise the index by .5 per month. Here's how the payments might go up in that case:
Jun 2012: \$2,254.18 (5.125%)
Jun 2013: \$2,412.80 (5.946%)
Jun 2014: \$2,605.85 (6.946%)
Jun 2015: \$2,798.56 (7.946%)
Jun 2016: \$2,990.05 (8.946%)
Jun 2017: \$3,179.47 (9.946%)
Jun 2018: \$3,212.48 (10.125%)

The worst case in 2018 looks scary, but I feel pretty comfortable sticking with the current loan through 2014. There's a chance we might decided to move to a better school district between now and then.

If a fixed-rate loan went down to 4.75, on the other hand, we'd break even after 2 years, and it would be worth it to refinance.

Here's another ARM vs fixed calculator:
http://www.dinkytown.net/java/MortgageArmvsFixed.html

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