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The mortgage rates dropped once again. I'm re-financing my mortgage once again. It's amazing it hasn't been even a year given that I did it last time.
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The rates were low in 2015 because of the anticipation for QE2. Once QE2 started, rates increased. Now rates are low again. Why? I don't understand. Maybe the marketplace is expecting a QE3.
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This time, instead of following my typical Stepping Down the Ladder script, I'm [re-financing](https://bhmansoes.com) my home loan to an ARM with a squander. Before you call me insane for choosing an ARM when rates are lower than ever, bear with me and read to the end.
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Stepping Down the Ladder
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Stepping Down the Ladder means re-financing to a set rate somewhat above the marketplace rate, with adequate credit from the loan provider to cover the closing cost. Rinse and repeat each time the rates go lower again.
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It's a no-lose proposal. You begin taking advantage of the lower rate on the first day. As the rates go lower, you keep securing to a lower rate, and never ever pay any closing expenses. Repeat this procedure until the rates reach the bottom. Because the rate is repaired, your rate will stay at the bottom.
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10-Year and 15-Year Fixed Rate Mortgages
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When I took a look at refinancing this time, I started with the exact same approach. Because I have a 15-year set rate home mortgage now, I looked at 15-year fixed and 10-year set options.
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If I choose another 15-year fixed, the best rate I can get is 3.625% without any closing expense. It's hardly rewarding due to the fact that my existing rate is 3.75%. If I opt for a 10-year repaired, I can get 3.25% without any closing expense.
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Between these 2 options, I would select the 10-year repaired. I've had a 15-year fixed home loan for a couple of years now. I wish to pay it off in ten years.
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5-Year Adjustable Rate Mortgage (ARM)
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I normally do not look at ARMs at all, due to the fact that the whole concept of Stepping Down the Ladder is about locking in the most affordable rate for the life of the loan. But since I was thinking about a 10-year repaired, I likewise took a look at ARMs.
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A 5/1 ARM has a fixed rate for the first 5 years. The rate starts adjusting every year after 5 years. If I'm going to pay off in 10 years, by the sixth year the remaining balance will be small enough that I can pay off if I want to. If I do not like the rate at that time, I will simply pay it off. Meanwhile I will have conserved a fair bit of interest in the first 5 years.
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If I opt for a 5/1 ARM, I can get 2.75% with no closing expense.
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Squander Refi
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A cash-out refi indicates obtaining more than the present loan balance. Usually you will pay a higher rate and/or greater charges if you re-finance with a cash-out. However, if your loan-to-value ratio (LTV) is low enough, there is a ceiling you can go to without sustaining a charge for cash-out.
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Why take squander? Because the lending institution credit is associated with the loan quantity. Within certain limits, the greater the loan quantity, the higher the loan provider credit. When the lender credit is high enough, it will have the ability to bump the rate down a notch and still make it a no closing expense loan.
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For example, suppose the [lender credit](https://360negocio.com.ng) for a $100k loan is $1,000 at 2.625% and the overall closing cost is $2,000. It implies the net closing expense is $1,000 for the 2.625% rate. To make it no cost you will have to go to 2.75%. However, if you increase the loan quantity to $200k, the lender credit will be $2,000, enough to cover the closing cost. Then the $200k loan will be no charge at 2.625%.
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If I increase the loan quantity to the maximum allowed, I can get a 5/1 ARM at 2.625% with a net $900 paid to me at closing in addition to the cash-out. I grabbed this deal.
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I'm using the same lending institution I utilized last time: First of Indiana ("FirstIB"). For the loan I desire, FirstIB uses the best offer amongst a list of lenders I took a look at: PenFed, National Mortgage Alliance, and AmeriSave.
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Won't obtaining more increase the total interest paid? Yes, if you only pay the minimum. Because the loan has no prepayment penalty, you can pay the cash-out right back in the first month. The only result of a greater loan amount will be a greater required monthly payment quantity. Since I'm going to follow a 10-year reward schedule and the 5/1 ARM uses 30-year amortization, the higher needed monthly payment is still lower than what I'm going to pay anyway.
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For instance, to settle $100k in ten years at 3.25%, I will need to pay $977 each month. The needed monthly payment on a $200k 5/1 ARM at 2.625% with a 30-year amortization is $803. If I obtain $200k, pay back $100k right away and keep paying $977 a month, the remaining $100k will still be paid off in ten years.
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Borrow More to Invest?
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I considered keeping the cash-out and investing it. After all, it's difficult to see how I can't earn more than 2.625% a year from my financial investments. A five-year CD from Melrose Credit Union pays 2.90% a year. If I just pay the needed minimum regular monthly payment and put the cash-out and the additional primary payments in a CD, as long as the CD rate is higher, I will come out ahead. The tax on the CD interest and the tax reduction on the mortgage interest will be a wash.
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If I put the additional money in a globally varied portfolio of stocks and bonds, the return needs to be higher - if I don't think that I should simply liquidate everything, pay off my home loan, and put the rest all in CDs. Everybody who is bring a mortgage and investing at the exact same time is wagering the financial investments will make more, otherwise they would not invest before the loan is paid off.
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But anticipated returns are simply that - anticipated. You can wager and expect all you desire. The real returns might come greater or lower than your expectation.
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Although the idea of earning money with other individuals's cash is appealing, I'm not yet that comfy with it. I might still do the CD however that has to do with it. I don't want to take more danger with this cash.
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Rates Have Nowhere to Go But Up?
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You may think rates have no place to go but up and that it's shortsighted to get an ARM now when rates are the most affordable. You may believe 5 years from now rate of interest will be much higher.
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I thought the exact same each time I re-financed in the last 10 years but rates keep coming down, reaching one historic low after another. I truthfully thought it was the last chance to re-finance in March 2010. That was 2 refinances back.
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The market has defied all predictions of greater rates. I will stop saying this will be my last re-finance. It won't shock me if rates go in either case: substantially greater or substantially lower. If rates go down again, I will re-finance again with an ARM and extend my 5-year set rate duration.
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When you are within 10 years to settling your home loan, re-financing to an ARM can save you money compared to a 10-year fixed rate mortgage. The rate is lower. So are the closing costs (for example PenFed charges a 1% origination cost on all repaired rate mortgages, but not on ARMs).
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Taking a squander and paying it right back will decrease the closing expenses. You may even make money for doing the re-finance. If you are going to settle in 10 years anyway, it's complimentary money.
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Reader Interactions
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Comments
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1. Money Beagle says
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June 13, 2011 at 5:50 am
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I would re-finance in a heart beat if it were possible, however the equity in our home is well below what the banks would think about in providing us a PMI-free loan w/o escrow (which is what we have today due to the truth that we put 20% down at the time). If I were able to re-finance I would definitely consider an ARM. Even if rates were greater a couple of years down the roadway, the quantity of concept I 'd be able to pay down in the mean time would more than likely well balance out any possible uptick down the road.
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2. David states
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June 13, 2011 at 7:39 am
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Very interesting analysis. Did you consider the PenFed 5/5 ARM? If so I'm curious about your ideas on that. I have actually looked at that over the last few years whenever there was a dip in rates but I constantly ended up going with the "more secure" repaired rate loan.
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3. Harry Sit states
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June 13, 2011 at 9:27 am
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@David - Yes I considered PenFed's 5/5 ARM. It's presently 3.25% for the first five years, versus 2.625% on the 5/1 ARM from [FirstIB](https://dre.com.ng). If I'm going to pay 3.25%, I might also get the 10-year repaired at 3.25% from FirstIB without any closing cost. For my loan, the PenFed 5/5 ARM isn't as excellent as the offers from FirstIB.
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4. Mike says
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June 13, 2011 at 10:46 am
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Interesting strategy. What is the max. LTV ratio you can squander without being punished?
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5. Harry Sit says
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June 13, 2011 at 10:47 am
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@Mike - 60%.
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6. TJ says
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June 13, 2011 at 6:00 pm
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Has teh no closing expense ended? I don't appear to see that option ...
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7. Harry Sit states
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June 13, 2011 at 8:30 pm
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@TJ - FirstIB just notes rates with closing expense. The next higher rate will have no closing cost. For instance if the highest rate (most affordable charges) noted is 3.5%, 3.625% will have no closing cost.
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8. [enonymous](https://www.hentiesbayproperties.com) says
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June 14, 2011 at 11:08 am
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excellent analysis
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obviously 60% LTV, and little adequate balance to be able to reward the loan with a balloon payment at the end of the 5 years is the essential
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the Penfed 5/5 is a tremendous deal at 3.25% (if that is stll there) specifically for those with jumbo home loans. but it is not a great offer for those in TFBs precise circumstance ...
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I remain in a 15 yr repaired, doing the refi thing yet once again (constantly no closing expenses), and the 5/5 or 5/1 and even 7/1 ARMs didn't make sense to me, largely since I hesitate to to make the big balloon payment required to be safe with a 5/1 or 7/1, and because the 3.25 5/5 ARM isn't low enough to attract me from my 3.75% 15 year fixed ...
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9. ChrisCD says
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June 17, 2011 at 7:59 am
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Forgive me, however I am uncertain how the no-closing expenses deal works. Whenever I have looked they have wished to wrap the expenses into the loan which isn't what I am seeking to do.
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In addition, our home value has dropped low enough to make it the option seem out of reach.
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cd:O)
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10. Heidi states
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June 18, 2011 at 4:54 pm
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Money Beagle - I was in a comparable circumstance. After calling numerous banks (due to the fact that their site calculators [consistently](https://pinnaclepropertythailand.com) concluded that I would not get approved for their mortgage due to my LTV), I found Connexus Cooperative credit union. They let me do an 80/20 to avoid PMI simply last December and I conserved over a $1,000 a month on my super jumbo mortgage. I have actually considering that paid off the HELOC and am [settling](https://rightplace.ie) the 25 year 3/3 ARM over a ten years amortization. You may desire to try providing a call.
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11. Madison says
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June 22, 2011 at 6:38 am
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I keep lowering our 5/5 ARM at penfed with a plan to settle in 5-10 years. And much like you, I believed every time it couldn't go lower. We're at 3.375% on our 5/5, and now of course, I see rates are even lower again!
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I'll have to have a look at FirstIB, I hadn't looked into their ARMs recently.
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12. TJ says
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June 23, 2011 at 9:26 pm
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@TFB - I see an alternative with no points, but this option still has $2k in fees (origination charge, appraisal, credit report, flood cert, title insurance coverage, [government recording](https://jualbeliproperti.id) charges)
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13. Harry Sit states
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June 23, 2011 at 10:59 pm
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@TJ - If you desire the no charge option, add 0.125% to the greatest [rate listed](https://ninestarproperties.ae). You need to call them.
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14. TJ states
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August 7, 2011 at 4:08 pm
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@TFB do you have any experience with boxhomeloans. com?
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I got much better rates for a thirty years than any other sites. I locked it but due to the fact that it was "after hours" (the weekend), they can't confirm until Monday, if it is lower than what i locked, my own will be the lower rate, if rates go on monday, they will overlook my request and I have to resubmit a lock demand.
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15. Harry Sit says
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August 7, 2011 at 6:16 pm
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@TJ - Sorry, I don't have any experience with Box Home Loans. Maybe inspect the FatWallet thread?
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16. very expense says
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February 19, 2012 at 7:27 pm
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First IB looks appealing for a 5/1 ARM. However, I reside in Maryland and it seems that they do not provide here. Do you know if this holds true and if so, could you recommend other institutions? I am seriously thinking about the PenFed 5/5 at 3.125% without any closing ... Thanks for a terrific site.
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17. Harry Sit says
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February 19, 2012 at 8:12 pm
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@super costs - Several other readers likewise reported the exact same thing. You can always call their 800 number to verify if it's still the case. If so, choose PenFed then. Maryland has a transfer tax. It'll be very difficult to beat the PenFed rate when you include the transfer tax, which PenFed says it covers.
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"5/5 Adjustable Rate Mortgage (ARM) Promotion: We will pay closing costs as much as $10,000 per loan, to include: Appraisal charge, Tax Service charge, CLO Access Fee, Title Fees, Transfer Tax Fees, Credit Report Fee, Flood Cert Fee, Recording Fee, Survey if needed and Work Verification Fee."
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18. very bill says
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March 12, 2012 at 10:55 am
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TFB - simply wanted to follow up on my publishing. I appled for the PenFed 5/5, which seemed great, however their appraisal came in method low - about 120k under what our last appraisal was one year earlier. Therefore, our loan quantity exceeds their limitation provided the evaluation. I am attempting to appeal however in the meantime, desired to see if you or others had other suggestions for a 5/1ARM or interest just product with no closing expenses? (BTW, I talked to FirstIB, and they do not lend to MD) Thanks once again.
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19. Harry Sit says
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March 12, 2012 at 12:55 pm
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@super bill - Regrettable the PenFed appraisal was available in low. I hope you will have the ability to effectively appeal it. Maybe they can ask for another one? The other 2 lending institutions on my brief list to inspect are NMA (nmaloans.com) and AmeriSave (amerisave.com). Also inspect the [long] [FatWallet thread](https://www.fiorinirooms.com).
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Reply
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20. Jc states
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July 6, 2012 at 8:52 am
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If my lyv is 50% and I refi from a 30 to a 15yr fix, and cash out 50,000 and then pay back the 50,000 towards the principal, it appears i will be saving a big amount of interest monthly. Is there a draw back to this besides a higher [month-to-month payment](https://nproperties.lk)?
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