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When to refinance

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  • When to refinance

    Bear with me as I fill in some of the convoluted details of my mortgage history.

    I have a crazy 40 year ARM that I refinanced into back in the heady days of the housing bubble in the summer of 2007 when I knew next to nothing about personal finance. I did the refinance to get a HELOC to remodel our kitchen. So many poor financial decisions were happening.

    When the housing market crashed, my house became worth nothing but my interest rate plummeted too so for a few years we had an interest rate that was under 3% which was lovely. I was underwater on the house back then and couldn't have refinanced if I wanted to but I didn't care because of the low interest rate.

    Fast forward to 2017. The HELOC (which we used in its entirety to remodel the kitchen right before the housing market crashed and our HELOC access was abruptly cut off) has been paid off and closed several years ago. What I am left with is the ARM that has 30 years on it. It adjust every year. The current interest rate is 3.625 and has steadily climbed over the past few years. I am in the Seattle area where housing prices have skyrocketed over the past few years so we probably have have about 250-300K in equity just from the insane rise in housing prices. The balance on the mortgage is 287K

    I have my personal finances in better shape these days (emergency fund that is probably larger than it needs to be, retirement plan maxed out each year, back door roths for me and my husband, more money placed in a taxable account in each year). There is no prepayment penalty so for the last few years I have made a one time payment equally a year of the principal payment so that this mortgage doesn't really span another 30 years.

    My question is this: how high do I let that interest rate get to before it makes sense to refinance into a fixed rate mortgage?

  • #2

    My question is this: how high do I let that interest rate get to before it makes sense to refinance into a fixed rate mortgage?
    Click to expand...

    Depends on how long you'll be there, and when you can pay it off. And when your variable is = or higher than a fixed payment.

    We just refinanced a jumbo (not franne/freddie compliant) at 3.75, 30 year fixed. @DarthVader has some options/decisions to make in this thread here from this week.

    If I were you, and staying, I'd refinance. (Because we just did, literally). We previously had a 30 year fixed, not a 40 year special.

    I don't like risk (with our house!!), I like knowing my house won't become an issue for 30 years. If we have low interest rates, I can refi again... otherwise, I'm shielded from interest rates rising. 4% on a house over history... is pretty good in my view.


    • #3
      --How much ; how long; money out; pay off early --- all depends on who you talk to in this forum.


      If >3 years in the house - refi into fixed to give you peace of mind on rates.

      I would actually take $$$ OUT to 80% and be responsible investing (TE muni that will probably beat your interest rates straight up) on that to keep since living in a higher risk natural disaster zone.


      • #4
        There is a great refi calculator by the "mortgage professor" that could answer your question best:

        It depends on how long you'll stay in your home...

        I also agree with StarTrekDoc. As bold as it sounds on paper, if the "BigOne" occurs in Seattle, you'd probably rather lose 200k of a million dollar home rather than 800k.


        • #5
          Thanks for the responses.

          I guess the biggest unknown is how long we plan on staying in the house. We are not attached to the home or our neighborhood in any way. If housing prices hadn't jumped so ridiculously over the past few years, we'd probably have already moved to a house and neighborhood we like more. For now, I feel "stuck" in house that we don't love but that is super affordable for our family because I'm not willing to triple my mortgage and we do want to stay in Seattle. But that could change in the next few years so I guess I should probably not refinance for now.

          I'll try that refinance calculator and play with what to do depending on how long we might stay in the house.

          Do people who live in earthquake or other natural disaster prone regions really take out the equity in their home and invest it? Does anyone actually know someone who has done that? Isn't that what the earthquake policy of my homeowner's insurance is there for?


          • #6
            The key here is that as interest rates go up, both the interest rate on your ARM and fixed rate mortgages will go up.  So if you don't refinance now and rates shoot up, you may face much higher fixed rates than you could get now.

            You should also see if there is a cap on how high your ARM rate can go, both year to year and overall

            at 287K in principle and a 40 year term I doubt your payment could ever go so high as to be unaffordable and suspect the overall impact of refinancing or not won't be too important

            Full disclosure I have a 5/1 ARM at 2.75% and no plans refinance but if my rates went way up would plan to just pay off the balance from my taxable account (or a lot of it anyway)


            • #7
              The ARM can adjust by 2% per year up to a cap of 11.875. The rate is tied to the 1 year US treasury bond yield.

              I think sneezy raises an interesting point--the overall impact of refinancing is likely to be small.

              Sometimes I find myself perseverating on small personal finance details to see if I can somehow tweak things to improve my overall financial picture but it's easy to lose sight that some of these tweaks would probably make very little difference.