- The Washington Times - Friday, January 18, 2008

Q:I took out a $400,000 mortgage almost five years ago. At the time, I told

my loan officer that I probably would be selling the property within five years, and he suggested that I take a 5/1 ARM at 4.375 percent. It seemed to make sense even though fixed-rate loans were at 5.50 percent at the time, so I went with his recommendation.

Now it appears that we could be in the property for another three to five years and that my mortgage rate is going to bounce up to nearly 7 percent. I feel that the loan officer gave me bad advice and that I should have played it safe.

Am I a candidate for refinancing? The property

is worth at least $500,000, and we have good income and credit.

A: Yes, you are an excellent candidate for refinancing, but I must come to your loan officer’s defense. Without crunching the numbers, I can tell you that his recommendation was good and appropriate. It’s very easy to determine whether he gave you good advice when I have 20/20 hindsight.

First, you told him that your expected hold period is five years. At the time, you could have taken a 30-year fixed rate at 5.50 percent. Instead, you took a program with a rate at 4.375 percent that can adjust after the first five years.

Now let’s run the numbers.

The principal and interest payment (P&I;) on a $400,000 loan amortized over 30 years is $1,997 per month. The P&I; payment at 5.50 percent is $2,271, a difference of $274 per month. Over a five-year period, the 5/1 adjustable-rate mortgage (ARM) saves you $16,440 in $274 monthly increments.

Since the interest rate is lower on the 5/1 ARM, principal is curtailed more quickly. My calculator tells me that the balance at the end of five years is $363,936. If you would have taken the 5.50 percent fixed rate, you would have paid $274 more per month and the principal balance would have fallen to $369,812, $5,876 more than the 5/1 ARM.

The 5/1 ARM over the first five years saved you $22,316.

Now let’s talk about today. The so-called zero-closing-cost refinancing rates on a 30-year fixed-rate loan are running around 6 percent. Let’s assume you refinance your existing balance to the no-cost rate of 6 percent and hold the loan for five more years.

Remember that this rate carries no fees, so your balance doesn’t increase.

The P&I; payment at 6 percent rises to $2,182. The principal balance at the end of the five-year period will be $338,658.

If you had taken the 5.50 percent fixed-rate five years ago and held the loan for 10 years, you would have forked out $2,271 per month and your balance would have dropped to $330,164.

The total payments under the refinancing plan is $250,740 and the remaining balance is $338,658.

Had you taken the fixed-rate at 5.50 percent, the payments over 10 years would total $272,520 and the remaining balance would have been $330,164.

You pay $21,780 less under the refinance plan, but your balance is $8,494 higher. This leaves a net difference of $13,286 to the upside under the refinancing plan. This also assumes that you hold the property for another five years. If you sell earlier, the savings increases.

Contrary to what you might think now, your loan officer gave you great advice. I would, however, lock into a 6 percent zero-closing-cost refinancing loan before your rate resets. Get that done ASAP, and make sure the loan is a true zero-closing-cost loan.

Henry Savage is president of PMC Mortgage in Alexandria. Reach him by e-mail (henrysavage@pmcmortgage.com).

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