Adjustable Rate Mortgages adjust eventually: time for a new one!

If you’re a long-time reader of the blog, you’ll know that I’m a big fan of my Adjustable Rate Mortgage (ARM). When I bought my condo, I took out a 5/1 ARM with a 3% initial rate. I refinanced six months later to a 5/1 ARM with a 2.5% initial rate.

It’s now over five years later (almost six in the condo!) and I didn’t actually pay off the mortgage like I had planned I would. I/we have paid off just over 60% of the original balance though! Back in early June 2017, we got a letter from our mortgage company explaining how the reset would work, with what the interest rate was then. Then again in early December, we got another letter, which is when they committed to an interest rate and new payment for the year. That letter explained:

  • The new interest rate: 4.125%
  • The new payment: $614.48 (versus the old payment of $1,027.32)
  • How much of the new payment would go to interest versus principal ($395.23 versus the prior $242.80 would go to interest)

This was a huge jump in interest, which we were not happy about. Yes, it was mitigated by the extra principal payments that I had previously made, but it still seemed unnecessary. I had been doing research haphazardly and had found a lender a few years ago that offered low cost refinances, which was really important with the fact that our mortgage balance is now in the low $110,000 range. It’ll take about 3 months to break-even, so we will only save about $500 on interest in 2018, but we’ll save about $2,000 in 2019, especially since our current mortgage would have continued to reset annually (and at today’s rates, it would go to 4.875% at the next reset). We concluded back then though that we should wait until the rate reset to refinance again and that we would probably go with a 10 year amortization.

Research was done, spreadsheets were made, and I eventually won my husband over that we should refinance to another ARM! I was pretty surprised he came on board with the ARM. He attributes it primarily to realizing what the mortgage balance will be in another 5 years on a 10 year amortization – it will sit around $60,000 and by then, we will likely have gotten bored of it finally and paid it off. We did ponder this quite carefully though because it seems once your mortgage balance goes under $110,000, you can’t get as good of rates any more, so that means that this is our last chance to refinance to a more favorable rate. When we first started looking, the 10 year fixed rate mortgage was 3.19% and the 5/1 ARM with 10 year amortization was 3.09%, so the fixed rate seemed like a better choice. By the time we actually applied though, the 10 year fixed rate was up to 3.59% and with a 0.5 percentage point difference, we pulled the trigger on the ARM!

We’ve also discussed our strategies for paying off the rest of the mortgage, after letting it go with “just” the required payments for the last 3 years. (I say just in quotes because they paid the balance down by $28,465 or just about $10,000 per year thanks to all of those extra principal payments I had made in the first 2.5 years.) We’ve tossed around two main ideas:

  1. Paying it off when one of us receives a bonus that is more than the remaining mortgage balance
  2. Paying enough each year to keep it on track to pay it off before the rate resets in 5 years, which works out to about $12,000 per year or $6,000 twice per year

If we let it ride for the remaining 10 years, don’t pay anything extra, and the interest rate resets in the worst way at each adjustment date, then we have $25,415.07 left to pay in interest, which is a huge improvement over the $300,000+ that I started the mortgage with back in mid-2012, so no matter what we decide, it doesn’t have nearly as huge of an impact anymore.

Refinance by Day

It turns out that applying for a mortgage when your annual salary income is more than the mortgage balance is really easy and quick to be approved! It was a relatively calm refinance, compared to my previous one that involved stressing over whether the appraisal would come back high enough to give me 30% equity! They didn’t even ask our condo association for any information beyond the building’s insurance records. I was really worried that they wouldn’t put both of us on the mortgage since I currently have no income, but that wasn’t a problem at all, likely because we are married and our loan is under 20% of the condo’s appraised value.

Day 1: Saturday of a long weekend, we applied for the new mortgage, right after filing our taxes. An exciting date night!

Day 2: Second business day after we applied, both of our credit was pulled and we got a request for my husband’s 2017 W-2, 30 days of paystubs for him, and our photo identification. We uploaded the documentation and signed some documents.

Day 3: The appraiser contacted me to set up a time to come out and measure and photograph our place.

Day 4: The appraiser came out. The loan was approved based off of our income, though still contingent on the appraisal.

Day 14: The appraisal came back and all of the contingencies on the loan have been removed.

Day 28: We received the preliminary closing disclosure, which contained the original numbers from the application.

Day 29: We were contacted by the title company to schedule closing, which we scheduled for the following week.

Day 30: We received the closing disclosure.

Day 36: Closing day! We signed 90+ pages of documents and gave them a check that covered our $295 closing fee, $98 in fees to pay off the previous mortgage loan, interest for all of March and a bit of April to the old loan company AND interest for most of April to the new loan company.

Day 42: Loan disbursement day. The old mortgage was paid off this day and has been marked as paid off on my credit report. It feels a bit anticlimactic to log into the online banking and see the mortgage paid off when a new one is still coming, with a different bank.

Conclusion

We don’t have to make a payment to the new mortgage company until June 1st, so we calculated how much we missed paying in principal since we paid all that interest at closing, but no principal. I’ve already made a $670.85 principal only payment to the new mortgage this month and we will make a similarly sized one in May, plus any interest we get back from the old mortgage, which should hopefully come in the next couple of weeks.

The other side benefit of this is that now both of our names are on the mortgage and the deed of the condo! Now my husband has a better response for when his friends sass him about this being “my” condo and not ours or his. (Yes, this means we settled up the equity in the condo so we both own half of it. It’s really nice to have a decent sized taxable account of my own now!)

I’m really glad I didn’t let myself be scared into a 30 year mortgage when I bought the place six years ago. I went from a 3% 5/1 ARM to a 2.5% 5/1 ARM and now to a 3.09% 5/1 ARM with a 10 year amortization. Thanks to reducing the amortization so much (from 25 years to 10 years), the rate we have now is really not that different from my first rate six years ago and the required payment is even lower than my first payment was ($1,205.79). I’m glad I didn’t take out a 15 year fixed rate mortgage six years ago – that would have left me with a $1,975 required monthly payment, which felt huge on my monthly salary at the time. Instead, I took out a 5/1 ARM with the same interest rate and made extra payments when I could, with my non-salary income.

 

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9 thoughts on “Adjustable Rate Mortgages adjust eventually: time for a new one!

  1. I’m glad this worked out! I remember when you were briefly stressing out about having made the ARM decision and potentially regretting it (I also remember the second-guessing of the decision to pre-pay). It likely would have worked out just fine had you made different decisions instead too. Being responsible with finances on top of being high income makes a lot of things work out well.

    • Me too! The biggest help in reducing its stress is really that we can pay it off any time now by selling index funds from taxable or it’s smaller than my husband’s base salary. Other people have asked us why we don’t just pay it off, but honestly with some of the life changes and uncertainty lately, it has been nice to have more liquidity.

      Your last sentence is very accurate. Higher income than spending is a large factor in reducing my money stress. That’s also a huge part in why we don’t want to move from the condo to a house – it just seems like such a huge amount of money to spend to both of us.

  2. Congrats Leigh! I’ve been a long time reader, and I remember you debating your financing options when you first bought the condo. I bought my condo in Boston a year later than you, and I’m about to hit my 5/1 reset this fall (2.99 -> projected 4.95%). It seems like a giant scam to me that he 1 year LIBOR rate is almost the same as the 10 Yr Treasury, but that’s for another day!

    As we just had a baby last month, we’re going to move out of the city and buy a house this summer. We’ll see what rates look like at that point, but I’ll likely go with either a 7 or 10 ARM. We’ll be stretching the budget a bit, so I’m hoping I’ll be able to refinance during the next economic downturn. If interest rates do end up skyrocketing, I’m planning to potentially use a large portion of my taxable account to pay down the balance. Best of luck to you and your husband!

    • Thanks Mark! Congrats to you and your wife on your baby :) It frustrates me that a mortgage with 25 years left will get worse or comparable rates to getting a new 30 year mortgage, which is why we ended up moving to a new lender with an even shorter amortization. For example, a new 0 point 5/1 ARM loan with our previous lender would be 4% even today, yet our index plus margin would be 4.95% and rounded to 5%. That one percentage point spread is huge! (I published this post today before this week’s LIBOR rate had been posted.)

      I have a really hard time seeing it make sense to fix a mortgage rate for 30 years when most people are unlikely to stay in their house for that long. That’s why I like ARMs, especially when a shorter amortization payment isn’t always doable in the monthly budget, but you have other assets or cash flow to help you pay it down. Good luck with your house search! We have haphazardly searched for more space occasionally, but we neither want to leave the city nor pay $1M for a 3 bedroom house, so we are staying put.

  3. I’m glad the ARM worked out for you! Like nicoleandmaggie, I remember some of the pre-paying trepidation so it’s really good to hear that your plan yielded the intended result (i.e. less stress in stressful times). I look forward to your eventual payoff post! :)

    • Thanks! :) I can’t wait for the eventual payoff post too! We will get there. It has been really nice to have that extra $100,000 liquid over the last two years though. The more the condo appreciates and the higher our income goes, the less I want to pay down the mortgage quickly. Isn’t it funny how that works?

    • You totally should! I feel like there is a lack of information and understanding on how ARMs work. I’m glad I waited to refinance until after the rate changed this year so that I could better see how it works!

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