FAQ
Should I Refinance My Mortgage?
How do Adjustable Rate Mortgages (ARM) work?
What ARM terms should I understand and how does an ARM work?
Should I Refinance My Mortgage?
With the advent of No Closing Cost Programs, refinancing is more popular than ever before. We have found
that even a quarter point drop in your rate will generate monthly savings. (Keep in mind that the larger
the mortgage, the more $ savings you will see by refinancing). On a no cost loan the appraisal, credit,
title, points and origination fees are all paid by the lender. The only costs paid by the borrower at
closing are interest, and setting up new impound accounts, and your existing loan most refund the equivalent
amounts from that loan!
The alternative to a No Closing Cost Program is a mortgage with standard closing costs (typically better
rates than NCC Programs). To decide if you should refinance utilizing a loan with closing costs, you should
take the total of the closing costs and divide it by the monthly savings provided. The result tells you how
many months you must stay with the mortgage in order to start realizing a net savings. You may also want
to do a similar calculation to decide whether a NCC program or a standard program is better for you. The
rule of thumb is that if you plan staying in the mortgage for a long period of time, paying the closing costs
will save you money in the long run..
Example 1 - No Cost Closing
If a borrower can refinance their mortgage, with a NO closing cost loan, and lower their payment $80 per
month. This is an annual savings of $960 and is obviously a good deal.
Example 2 - Loan with standard closing costs
A borrower can refinance their current mortgage saving $200 per month, but they will owe $2400 at closing.
If the borrower plans on staying in the home for more than 12 months, they will begin to realize a net savings!
Example 3 - Refinance with Cash Out
If a borrower can refinance their home, and pull enough cash out of their loan to pay off high interest
credit cards, and lower their overall payments, this is an excellent way of improving your short term cash
flow situation.
How do Adjustable Rate Mortgages (ARM) work?
Adjustable rate mortgages typically allow you to take advantage of lower rates that 30 or 15 year fixed rate
mortgages. This is because the lender has a much better feel for the cost of money in the near term, and is
willing to pass those savings on to you. The down side is that as rates move, so will your payment, so although
you may get a great rate for today, you have no guarantee of what your rate will be down the road. There is a
middle ground available. Often referred to as a 3/1, 5/1 or 7/1 ARM, these loans fix your rate for the first 3,
5 or 7 years of the loan, and begin adjusting after that (either monthly, semi-annually or annually). These
loans are great for clients who expect to sell the property within or shortly after the fixed rate period, as
their circumstances change.
What ARM terms should I understand and how does an ARM work?
Index
All Arms are tied to an Index. The most common are; LIBOR, Monthly Treasury Average, 11th District Cost of
Funds, etc. These indexes typically move weekly, monthly, quarterly, etc.
Margin
Most lenders assign a margin to a new loan, in the form of a fixed percentage for the life of the loan. This is
also referred to as the "profit margin."
Real Rate
If you add the current index to the loans margin, the result is the Real Rate.
Adjustment
ARMs have a monthly, semi-annual or annual adjustment period. At the end of this period, your rate will adjust
based on what has happened with the index your loan is tied to (if it goes up, your payment goes up, if the index
goes down, your payment goes down).
Rate Caps
ARMS typically have two caps associated with them, the first tells you the maximum amount your rate can change at
each adjustment (Adjustment Cap), the other tells you the maximum rate you will pay during the life of the loan (Life Cap).
