- The Washington Times - Friday, April 9, 2010

Q. My wife and I have a jumbo loan and were approached by a friend in the mortgage business who suggested we refinance. We currently have a 30-year fixed rate at 5.75 percent with 25 years left. Our principal and interest payment is $4,668 per month and our current balance is about $740,000.

Because we plan on selling our home in fewer than 10 years, my mortgage friend suggested I refinance to a 7/1 adjustable-rate mortgage at 4.25 percent with very few closing costs.

He said if I continue to make my current mortgage payment, my principal balance will be a lot lower by the time I sell. I am worried the rate will go up after seven years and any savings will be wiped out. Any thoughts?

A. I think your mortgage friend is giving you good advice. This is a simple exercise in number-crunching. I am going to assume this 7/1 ARM has interest-rate caps of 2 percent per year and a 10.25 percent lifetime cap, which is very common. This means your interest rate would remain at 4.25 percent for the first seven years and not rise by more than 2 percent annually thereafter, never rising above 10.25 percent.

With the information you gave me, I have figured out the following, assuming you don’t refinance:

• The initial balance of your loan was $800,000.

• Your balance seven years from now will be about $627,000.

• The balance 10 years from now will be about $562,000.

Let’s say you refinance your existing balance of $740,000 to an ARM that will carry an interest rate of 4.25 percent for the first seven years and rise to 6.25 percent, 8.25 percent and 10.25 percent in years eight, nine and 10, respectively. Let’s also say you continue to make payments of $4,668 per month. Here’s what the calculator tells me:

• At the end of seven years, your balance drops to about $540,000 and the interest rate rises to 6.25 percent;

• At the end of eight years, after paying 6.25 percent in year eight, the balance drops to about $517,000.

• At the end of nine years, after paying 8.25 percent in year nine, the balance drops to about $503,000.

• At the end of 10 years, after paying 10.25 percent in year 10, the balance drops to about $498,000.

Even in the worst-case scenario, with you selling your home in 10 years and the interest rate increasing by the maximum 2 percent annually in years eight, nine and 10, your mortgage balance would be about $64,000 less if you refinance to the 7/1 ARM.

If you end up selling in seven years, the difference is a whopping $87,000. Your loan officer is smart. Present this column to him, and I bet he will confirm my numbers.

Henry Savage is president of PMC Mortgage in Alexandria, Va. Reach him at henrysavage@pmcmortgage.com.

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