Mortgage Lending - an Insider Tell-All

LIST YOU CAN USE - January 2007 

Should You Refinance Your Adjustable Loan to a Fixed Rate Loan?

1. Go get the package of paperwork you signed when you took out your last loan/bought the house. This is KEY! How can you compare anything new if you don't know what you have already? Then find the information to fill out the following questions:
   
   What is the index? ________________________
   What is the margin? _______________________
   What is the Periodic Cap? __________________
   What is the Lifetime Cap? __________________
   What is the date of first adjustment? ________
   The date of first adjustment is when you will no longer have your loan payments based on the fixed interest rate you have had up to this point.
2. Calculate what the interest rate is going to be. Visit mortgage-x to see what the current rate is for every index possible. Find your index and input the value below:
   
   Currently my index is at _________________
   Add the margin to the index
   
   My Margin + Index is ______________
   Now you know where your rate will be set for the next year. If the increase seems extremely high, make sure you take into account the "caps" on your loan. The way you do this is take your margin + index rate and subtract your current fixed interest rate. How much was the change? Is that more or less than the "periodic cap" or the "lifetime cap" you looked up in step 1? If the change was greater than either cap, your rate is only going up by the capped amount. For example, say your index + margin is 7.50% and your fixed rate loan is at 5.00%. That is an increase of 2.50%. However, if your periodic cap is set at 2.00% then your loan rate could only go up by that amount (2.00% + 5.00% = 7.00%). If you have more questions call me (972-765-4005).
3. Calculate the cost of doing nothing. That's right, figure out what it would cost for the next year to leave everything as-is. Visit this simple mortgage calculator here and insert your balance, the new interest rate (margin + index) and then multiply the payment amount by 12 to get the amount you will pay for the next year.
   
   By doing nothing my loan will cost _______________ for the next year
4. Estimate that closing costs on a refinance are equal to 3% of the amount you borrow or $3,000 whichever number is greater. Input that amount here:
   
   By refinancing I will spend approximately _________________________
5. This is the most important of all! How long are you going to remain in that home? I know you can't predict the future but how old are your kids? If they are not yet school-age, do you like the public schools they will be attending? These kinds of questions may lead to the answer.
   
   I plan to stay in my home another ____________ years
   So what you do is take the amount per year of doing nothing x the number of years you stay in the home to calculate the amount of doing nothing until I sell. Then subtract the amount you will spend to refinance and that gives you the amount you need to pay OR LESS to be better off refinancing instead of doing nothing. Divide this total amount by the number of months you would make a payment until you sold. (i.e. 2 years = 24 months). Go back to the amortization calculator link and put in the amount to borrow, the monthly payment which you just calulated and DELETE the interest rate so that box is empty. Hit Calculate and that is the interest rate you need to get when refinancing or Better.
   
   Amount per year of doing nothing ____________ X
   Number of years you plan to stay in home _________ = total cost of doing nothing
   Subtract the Cost of Refinancing ____________ then divide by the number of months you plan to stay _______ = monthly payment you must have OR LESS to refinance.