Hi Harriet,

The links says ING is offering their 5 yr ARM at 4.5%...

We are advising all clients who qualify to refinance using your equity to buydown to the lowest available permanent interest rate (currently we have been locking in at 4.25%.) The buydown costs to secure 4.25% shift daily, and have been ranging in a cost-to-savings breakeven period from 2 to 3.5 years forward.

That is to say, the total transaction costs required to go from your current interest levels to the lowest-available levels create a monthly interest cost savings that takes about 2 to 3.5 years to accumulate to break even on the upfront costs to finance (including the opportunity costs (return, or interest earnable) that you forfeit on the additional funds put up (usually from 'dead equity' and nothing from pocket) to buy the permanent rate to the lowest coupon of 4.25%

Future longterm rates will virtually *never* drop far enough, nor would there ever be sufficient incentives, to incur the deadweight sunken costs of another refinance for the purposes of reducing a loan rate further. The breakeven point would stretch out beyond any acceptable reality.

The only logical/financial reasons to pay a higher permanent interest rate are;
A) don't expect to stay put at least 4+ years,
B) expect to refinance to access equity before 4+ years,
C) expect sell before 4+ years.

THEREFORE, we are advising taking the strongest longterm permanent financing position available now, while the government remains as a deep-pocket buyer of mortgage bonds..

Cheers,
Dave Donhoff
Leverage Planner

Dave,

Are you saying this is not a good deal?

I've been looking and have not found any fixed 30-year rates this low, or even below 5%, without very high costs in points.

What's the best way to find the best deal?

Thanks!

My credit union is offering the following for 30 year fixed rate:

5.125%
No points
5.179% APR
$5.4449 payment factor

5.000%
0.25% point
5.076% APR
$5.3682 payment factor

4.750%
1.00% point
4.890% APR
$5.2165 payment factor

Total fees other than discount points are about $1600.

Harriet, I am not an expert like Dave but I have been muddling through this refi process since about February. It has been an educational time to say the least. I think that 1 point for a 4.75% is not extravagant at all.

Figure out what the difference in payment for your home would be between 4.75 and 4.5 and think about how long you realistically plan to stay in the home. If it is longer than the break even point, get the fixed. The ING would be great if you only plan on staying during the fixed rate period. Otherwise, get the 4.75% fixed for the life of the loan where you do not need to worry about the rates of the future. 4.75 is phenomenal, I think that it is amazing that we can even still get those.

I also don't think that you would be able to get the rate to stay fixed for 10 years, something there sounds awfully screwy.

Hi Harriet,

Are you saying this is not a good deal?

The question is; is it the best way to structure the loan for YOU?
> Are you expecting rates to go further down in 5 years?
> Are you expecting to likely move or sell in 5 years?
> Are you expecting to refinance for liquidity or equity rebalancing within 5 years?

If the answer to one or more of those is "yes" then it might be a worthy deal.
If the answers are all "no" then I do not advise it.

I've been looking and have not found any fixed 30-year rates this low, or even below 5%, without very high costs in points.

"Very High" as measured in what terms? Read my prior post, carefully and thoroughly.
The costs, as a percentage' are meaningless.
The costs, in absolute dollars, are meaningless.

The costs, versus the savings, and HOW LONG TO BREAK EVEN with the savings overcoming the costs...
THAT IS THE CRITICAL MEASURE.

What's the best way to find the best deal?

Stop shopping "deals" and start shopping "dealers."

The industry advertising is aimed at people who do not understand finance, and who make their financial decisions without professional guidance. Don't be their target.

Remember the old Midas Muffler advertisement that said;
"You can pay me now, *OR* you can pay me later!"

Same/same in mortgage financing...

You can pay a little more now, or you'll end up paying a lot more later.

The ONLY questions remaining are;
a) How much will I save "later"? (the more the better.)
b) how soon will "later" arrive? (the sooner the better.)
c) will you last long enough for the "later" to matter.
(How well you manage reserves matters as much as longevity.)

Cheers,
Dave Donhoff
Leverage Planner

Not sure I understand this:

The ONLY questions remaining are;
a) How much will I save "later"? (the more the better.)
b) how soon will "later" arrive? (the sooner the better.)
c) will you last long enough for the "later" to matter.
(How well you manage reserves matters as much as longevity.)

If you don't mind explaining, I would be interested ...

Hi Harriet,

If you don't mind explaining, I would be interested ...

OK;
The ONLY questions remaining are;
a) How much will I save "later"? (the more the better.)

What are your current monthly cash interest costs versus interest costs at 4%-4.25%?

Additional alternative consideration questions;
What are your future expectations about inflation arriving?
What do you think inflation will do to fixed-income accounts?
What result will you experience if you access your dead-equity at 4-4.25 today, and are able to get a safe rate of return in fixed-income accounts at double or triple that in the future?

b) how soon will "later" arrive? (the sooner the better.)

A) if you would be saving money by having access to your dead-equity at 3-4% (instead of its current costs,)
OR
If you would be earning money now, or in the near inflationary future, by employing that equity at higher returns than its 3-4% costs...

THEN... how long would those "monthly benefits" (savings or earnings) take to accumulate to be more than the costs of securing the funds today?

THUS; "when will "later" arrive?

c) will you last long enough for the "later" to matter.
(How well you manage reserves matters as much as longevity.)

Will you;
A) live long enough to enjoy the above?
B) stay in your home long enough to enjoy the above?
C) leave your loan alone long enough to enjoy the above?

Conservative people tend to do so more than less-conservative types.

Cheers,
Dave Donhoff
Leverage Planner

If we refinance our loan balance using the 4.75 loan I mentioned upthread, we will save about $180/month if we roll the closing costs into the loan ($200/month if we don't). That extra will go straight into our savings, currently in a low-yield but low-risk account. It will take about 21 months (not taking interest earnings into account) for those savings to pay for the loan cost.

We have no plans to sell the house any time soon.

Inflation? I have no idea. I do expect that interest rates will also increase, so at least those with savings will be earning more on them.

It does seem like we would come out ahead if we refinanced again, though I hate to keep paying for these long-term loans and then not keeping them.

In any case, it won't change our lives that much either way.

Harriet,
I am curious. Why would you want to permanently pay 4.75%, when you could choose 4.25%? The greater savings you'd receive would probably pay off the greater up front discount points in about the same time, but then you'd be left with the lower cost for the rest of the time you ahve the loan.

What's your reasoning?

Dave Donhoff
Leverage Planner
(ALWAYS interested in understanding why people make these decisions financially, when they do.)

Where can I get 4.25%? I have not seen a fixed rate mortgage with that low a rate.

Nobody's ADVERTISING them... the public isn't shown the rates available in the wholesale market.

You'd want to use a broker. We're getting them at 4.0%
Dave Donhoff
Leverage Planner

So how does one go about finding a broker? It seems like there's a world of scams out there.

Hi Harriet,
There's ABSOLUTELY a world of scams out there... but there's just as many (if not more) on the retail side than wholesale... especially now, since many states have established that licensed Mortgage Brokers are regulatorily required to treat their clients with "fiduciary respect."

That is to say, the Mortgage Broker must now "work on YOUR behalf, with YOUR best financial interests ahead of their own."

Bank loan officers, in contrast, are strictly agents of THEIR OWN BANK, and have no regulatory requirement to represent your best interests at all.

How to find a good Broker? Same way you would go about shopping for a good lawyer, accountant, or any other fiduciary professional, basically. Start by opening up to the professionals around you asking for referrals... look in your "community" at who is known to be a financial professional. Interview for character, competence & communication skills (the 3-C's for fiduciaries.)

Cheers,
Dave Donhoff
Leverage Planner

My thoughts on this...

This is a balloon loan, plain and simple. At the end of 5 years, you have to get a new loan. Whether you stick with ING or not, you will be refinancing this money. What are their options for that? Are they guaranteeing you a loan in 5 years for this money regrdless of your credit score or current income? Because if you don't qualify for a new loan, you could be out of luck and owe the balance immediately or have to refinance somewhere else with who knows what rate or terms.

This also guarantees them a new 30 year loan every 5 years for perpetuity. It sounds like in 5 years they are not going to offer you a loan financed at a rate over 25 years, they are going to offer you another 5 year balloon loan financed at a rate similar to a 30 year loan. Unless you are disciplined with your payments and intend to pay as if it was a 25 year loan, you will never pay this loan off.

I would take advantage of low rates and finiance for 30 years, personally. You just can't predict where you will be in 5 years and if you will qualify for their replacement loan product.

What I understand from reading the fine print is that 6 months after you take out the loan, you can extend it for another 5 years at the best rate. So by the end of 2009 you could have basically a 10-year loan in place. Rates may or may not be this low for the rest of the year, but I don't expect them to go up dramatically.

Whether that second 5 years is amortized over 30 years or not, I don't recall, but that would be a pretty small point, wouldn't it?

I was considering this because we have refinanced twice in the past 10 years.* I was wondering if we really would keep another loan in place for 5 years, let alone 30. Our goal is to set aside enough cash over the next 10 years to pay off the balance -- when we have that, we can decide if it makes sense to do so at that time, but it would be an option.

Also, I don't know if we will even stay in this house more than 10 years -- but time can go by before you realize it.

I would like to take Dave's advice and find a mortgage broker. That seems like the way to go. But it's not that easy figuring out where to start, and in the meantime, rates are ticking up a bit.

*First time: we went to a 15-year loan at the then-amazing rate of 5.125. After a few years of paying those high payments and putting the max into retirement accounts, we had no liquid cash. So for the second refinance, we went to a 30-year loan at 6.125. This has been working out well for us. Refinancing now at the current low rates would obviously allow us to retain more cash, but we can certainly manage as we are. I still remember when I bought my first house in 1993 and the 7.25% loan seemed really great.

I don't see anything about extending it an additional 5 years after 6 months, but I skimmed. I did see this:

"If you meet our credit standards at the time you apply for a Rate Renew, you can re-lock your rate at our current rates for another 5 years for only $750. You won't extend the time to pay off your mortgage and there's no need to apply for a new one and pay full closing costs."

So it doesn't turn into a new 30 year loan, thankfully, but as I suspected, you DO have to qualify at their current standards. I read that as at the end of the first 5, you can extend it, not that you can extend it at anytime.

Of course, the best way to get answers is to call. :)

Good luck with it!