I'm a first time homebuyer and currently have a 30-year fixed first
mortgage for 5.6% and a 15-year fixed second for 7.5% with a balloon
payment on the second due at end.

The guy who worked this deal is now with a different company and
called me up to see how I liked the house. He then offered to set me
up with a interest-only 7/1 ARM that he said would bring my monthly
payments down by about $400 bucks. The new loan amount would be for
80% of the appraised value so I still wouldn't have to worry about PMI
but the 80% would cover the amount owed on the first two loans. He
also said that what I would need to do (his opinion) is refinance
before the seven years to avoid the potential for a higher interest
rate.

Factors:

1. House has appreciated about 75-100K.

2. When I look at the amount still owed on the house, I might as well
be in an interest only loan.

3. I plan on staying in this house until at least 2010.

4. I have no other significant debt.

Questions.

1. Is this absolutely not a good idea?

2. Is it not a good idea to refinance after only one year?

3. If not this ARM, would I still benefit from a refinance to combine
both my loans into one at about 6.5% 30-year fixed?

I realize that I probably haven't provided near enough information,
however, I'm just looking for some "what would I do" comments from
those that have been down these roads before!

TIA!

On 13 Jul 2004 06:45:53 -0700, someone wrote:

2. When I look at the amount still owed on the house, I might as well
be in an interest only loan.

3. I plan on staying in this house until at least 2010.

Six years ago, we built our house and took a 15 year loan (fixed).
Two years ago (i.e.four years into the loan w/11 yrs remaining),
we refi'd for 10 years. Our monthly payment didn't go down but we
shortned the term, cutting out a year's worth of payments, that was
our savings. By 2012 we will have no mortgage on our house. If you
only look at monthly payment and "might as well be" interest only,
then you will always be renting your house from the bank.

If interest rates go up, you will not be able to refi the ARM for any
better rate.

So how do you want to bet???

-v.

"JLC" wrote...
I'm a first time homebuyer and currently have a 30-year fixed first
mortgage for 5.6% and a 15-year fixed second for 7.5% with a balloon
payment on the second due at end.

The guy who worked this deal is now with a different company and
called me up to see how I liked the house. He then offered to set me
up with a interest-only 7/1 ARM that he said would bring my monthly
payments down by about $400 bucks. The new loan amount would be for
80% of the appraised value so I still wouldn't have to worry about PMI
but the 80% would cover the amount owed on the first two loans. He
also said that what I would need to do (his opinion) is refinance
before the seven years to avoid the potential for a higher interest
rate.

First, I am NOT a fan of refinancing for refinancing's sake, just to save
some $$ in monthly payments. You have to look at the whole situation,
including the potential up- and down-side limits.

Second, I am NOT a fan of interest-only loans in any case! The cost of the
forced refinancing in 7 years could become a real problem.

You will save $400/month out of what current total? What is the initial
interest rate on the new loan that gives you that savings?

What is the principle on the second, and how much is the balloon? What is
the monthly payment for it alone? It is possible you ARE paying "interest
only" on that loan already. How quickly can you pay it off, either with
higher monthly payments or other, larger, periodic principal payments?

Next, what are the costs of the refi -- closing costs plus interest rate?
If closing costs are rolled into the loan, what is the additional monthly
payment due to the increase? How many years have you already paid into the
current loans?

Is it possible this guy is simply contacting all his former clients,
churning up business for his new company; or is he a trustworthy business
person? Are the terms he quoted guaranteed, or "typical" for the day he
called you?

[More in line below]

Factors:

1. House has appreciated about 75-100K.
2. When I look at the amount still owed on the house, I might as well
be in an interest only loan.
3. I plan on staying in this house until at least 2010.
4. I have no other significant debt.

Questions.

1. Is this absolutely not a good idea?

It's worth costing out, but there may be better options in the long run.
Primary among them, pay off the second, so your high-interest loan goes away
faster.

All mortgages pay down principal slowly in the early years. Any extra
principal payments you make will substantially reduce the cost and term of
the loan. A single extra payment each year will reduce a 30-year loan to
about 18 years!


2. Is it not a good idea to refinance after only one year?

Generally not, unless you can get a substantially better deal. Your closing
costs, amortized over 1 year instead of 15-30, are HUGE!

Also, in this case, you have a significant downside risk with the
interest-only ARM.


3. If not this ARM, would I still benefit from a refinance to combine
both my loans into one at about 6.5% 30-year fixed?

I would NOT do that! You would be increasing your long-term costs.