Stump the Stammtisch: Refinancing our 3/1 ARM…

“Hello Front Steppers,

We bought our SFR in 2004 and have a 3/1 ARM of $600K on a $1mil home. We can pay the newly adjusted amount without really changing our lifestyle, but we would like to refinance before the next rate adjustment in 10 months. With all that is going on in the mortgage industry right now, how will that affect a refinance? Both our FICO scores are around 770.

Thanks for any insight you can provide.

M”

My first bit of advice would be to read this post so you have a bit of an understanding of the “true” state of the industry. You might read this post as well.

Then it seems to me from your question you’re concerned about a) being able to refinance, and b) getting a good rate. Given the limited information you provided, I’d have to say you should be okay with a refi as long as you can afford payments at the new rates. All the shake ups in the industry really come down to financial qualifications, whether it be a refi, or purchase.  Money will no longer be lent to people that shouldn’t be borrowing in the first place, and of course rates are most likely a fair bit higher than what you are paying currently.

The long and short is as long as you can provide documentation, have good credit, and deal with the right people (brokers), you should be okay.  But I will be the first to admit I am not a mortgage expert.  The best advice I can give is to pick up the phone and call a few mortgage brokers, or maybe a few will chime in.  If you need numbers, feel free to email me again.

Thanks for reading, asking, and hanging out on theFrontSteps. Hope this helps.

alex

10 thoughts on “Stump the Stammtisch: Refinancing our 3/1 ARM…

  1. Dear M:

    The short answer is that it will not affect you, especiall since you have a credit score over 700. There is no demand for mortgage backed securities that pass through Wall Street. This slams all of the big banks”institutional lenders” out of the jumbo mortgage business (loans over 417,000 that the government won’t buy). HOWEVER, there are a number of smaller “portfolio lenders” who either fund their own loans or sell the loans to other sources. These lenders are doing loans on a business-as-ususal basis with the exception that they are slow because they are seeing volume like they’ve never seen volume before.

    Rates on 3 to 10 year fixed loans range from the low to high 6 percent range depending on how long a fixed period you want and other factors in your loan scenario. Start your loan process about 9 weeks before you want to close, which should probably be about 9 weeks before your loan adjusts to the “fully indexed rate” which will probably be about a percent higher than what you’re paying now. I would be happy to answer any other questions you have. Good Luck. Miles

  2. Thanks for the responses Alex and Miles. I’ve read the other 2 posts and found them both very informative. We can provide documentation of our income and since we don’t live lavishly and have no other debt, we have no problems making our mortgage payments. But my big fear is that our PITI to gross income ratio is 37% which might be considered too high in the current mortagage climate.

    -M

  3. M – I am not a mortgage broker, but I though there were two ratios: front and back. Front ratio is your PITI over gross income. Back ratio is PITI plus any additional recurring debt (car payment, student loans, etc.) over gross income. The lender’s preference, as I understand it, is to have the front ratio to be around 0.28, and back ratio to be around 0.36. So if you don’t have any other recurring debt, I wonder if the lenders will raise a big stink about that or not..

  4. Debt-to-income (dti) ratios are now pretty much 45% for both full documentation and stated loans, and on some lenders it is 50%. The large banks that have interest rates at 8% or higher and that have eliminated their stated programs now have dti ratios at 60%; this will be great news in a couple of months or so when their rates get competitive again. And stated income is only an eighth to rate, or $62.50 per month in your case. If you have a few months of cash reserves (2 to 6 months piti depending on the lender, so like $10,000 to $30,000) for full doc (and about $30,000 to $70,000 cash reserves for stated income), depending on the lender, then your loan would probably be a piece of cake. Please let me know if you have any more questions or would like to discuss your scenario in detail. Miles

  5. We are in a similar situation. 30-year fixed rates have jumped dramatically the past 60 days. We are looking at a 5/1 and a 7/1 ARM. ING has very competitive rates (6.125 on the 5/1 and 6.25 on the 7/1) and very low fees. We found ING on bankrate.com. Good luck!

    P.S. – I have no affiliation with bankrate.com or ING. Best!

  6. Everyone around here seems to assume that rates are headed back down. People should consider the possibility that rates may not. My parents bought a house with 12% interest. We’re not out of the woods with inflation and, with jumbo loans, it may not matter what the fed does. Rates on t-bills have been sinking while jumbo loan rates have skyrocketed. Why? Because the secondary market perceives risk. If that risk proves founded, rates could be higher next year.

    I’m not spreading doom and gloom. I just bought a place this week! But I locked into a 30 year fixed. If rates go down, I can always refi. If they go up, I have no exposure. I suspect that a lot of people steer into ARMs (especially the IO-variety) due to affordability issues, not because the rates are lower. This is not a great time to buy a place that you can’t afford…

    Anyway, all I’m saying is that 7% ain’t the end of the world. Historically, it’s still pretty damn low. And if you’re waiting on Greenspan to drop rates to 1% again, you’re in for a long wait.

    Good luck!

  7. I just heard from one of the “top producers” at that top producing company…

    that the sky is about to fall.

    it’s just a rumor. i think.

  8. Even though we are now faced with a much larger monthly payment due to the adjustment and possibly an even larger monthly payment if we refinance to a 30-yr fixed jumbo, we feel good about having chosen an ARM back in 2004. (Some background…it was not a IO ARM. I’m the kind of gal who likes to pay off principal.) The ARM was our way of “buying time” while getting into the house we wanted. We hoped that in 3 years we would be better off financially and thankfully we are better off now than in 2004.

    We would like some “peace of mind” which is why we’d like to refinance from our ARM to a fixed rate. I do realize that today’s rates are still fairly low (historically speaking) since older family members have told me about how they were paying 14% back in the 80s.

    As a side note, I don’t believe that we could afford to buy the same house today. I’m basing my statement on a purchase price of $1 mil with a 700K mortgage at 8% which makes a monthly mortgage of $5136.

    Anon8mizer – I didn’t know that there were 2 ratios. We have no other debt which should help.

    Miles – I never realized that it was okay to be as high as 45-60%. And we do have some cash reserves (about 50k).

    Peggy – Thanks for the tip. Good luck to you too.

    Dave – Congratulations on your Noe-Glen-Park-Eureka-Valley house. I look forward to hearing the details after you close the deal.

    Duggo – :)

    [Editor's note: M-Good luck. You know where to go if you need help.]

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