Advice, Pls.: Mort Fnancing 1st: 2 Year ARM 2nd: 3o Yr. Fixed
Hello:
Our mort. has a first and second loan. The first is a 2 year fixed for 5.2% for 170k; the second, a 30 year fixed for 43k.
My partner and I just got this house. We are afraid of how much higher interest rates may be; two years from now when we plan to refinance our mortgage.
We were thinking of
1.taking a HELOC and paying of the second loan; as one person adviced us.
2.we are like, clueless as to what else to do two years from now, when the ARM is due.
If we pre paid our mortgage and added 100.00 pre month on payment would that help us in two years?
Any advice on this matter will be appreciated.
We are totally clueless!
Thank you. 
First of all, the ARM will not become "due' as you say. An ARM is an Adjustable Rate Mortgage, which means you pay fixed payments for 2 years (in your case), then the interest rate will change based on the prevailing rates of the time.
Check your loan documents carefully to determine the following:
1. When the 2 years are up, what is the formula the lender will use to determine the interest rate? Some tie the rate to the prime rate, plus some amount, usually to a specific rate index (LIBOR, etc.). This will help you determine how much your monthly payment will rise when the rates change.
2. How often will the rate be adjusted? Some ARMs change rate every month, some every 6 months, etc.
3. What are the ARM's 2 "maximums" or 2 caps: maximum amount the rate can change in any given change period (see #2 above) and what is the maximum rate that can be charged altogether?
With this info in hand, you can tell how much of a hit you're going to take a) when the rate change period starts and b) how much it can change over time.
Taking a HELOC to pay the 2nd doesn't change your first--at least with your second, you know exactly what your payment will be for the next 30 years. (which isn't to say you shouldn't refinance the 2nd, only that it doesn't really do anything about your question on the first).
Prepaying your mortgage down always helps if you're trying to save money (you're decreasing the principal faster and therfeore paying less interest overall on the loan), but it's only good in the long term. Paying some in advance won't do much to lower that $170k in the first 2 years.
ARMs are great for getting more house for less money NOW, but as you can see, you have to be prepared for that mortgage payment to increase in 2 years if interest rates increase.
I'm not a mortgage broker or lender, so take this advice for what you will (always seek professional counsel, etc., etc.):
1. You could try to refinance the first to a fixed rate loan if you're more comfortable with that.
2. You can hang tight and hope that rates don't rise too much in the next 2 years if you're waiting to refinance. Check your docs to see what you're looking at for payments in 2 years.
3. You could refinance the whole thing (1st and 2nd) to either another ARM (with a period that corresponds to how long you're going to be in the house: 2, 3, 4, 5 year etc) or to a fixed rate loan.
Andy
Thank you so much! I am not very numbers oriented but yes, there are other details in terms of the portion of our mortgage with that is the ARM.
Your response gives me more clarity. I personally believe that I am "mathematically disabled' so I shut things out when it comes to numbers. Which is why I think we need to seek the help of a CPA or a Personal Financial Adviser.
We are beginning to sign up and attend various workshops concerning different real estate topics, so, we should be able to know a lot more soon
:-D :-D
Thanks to this forum, I am learning a lot more ... Thank you again!
1) where is the house located? we are coming into a very busy buying season in some parts of the country - and these sales are driving higher prices in some areas. Consider getting another appraisal done (even if you just bought the house in the last 6mo. to a year).
2) having purchased the house and having ownership gives you more in terms of mortgage options. Maybe the value has jumped a bit - and at even 5% increase in value, you may be able to roll your 1st and 2nd into something like a 5 year fixed pay ARM without going to 100%.
I work with property investors every day. I don't know your current situation, but I do know that the successful, cash rich and property rich investors know that 80/20's and 80/10/10's, while good for getting into properties in a pinch, are not a long term solution.
Take a look at yahoo's home value comparison site. See what the value of nearby houses are and the most recent sales dates. These numbers are culled at a slower rate than pay services, but still might give you an idea of what a *new* appraisal may come out to.
Keep in mind - if you can roll your 1st and 2nd into a *new* fixed pay (like a 3 or 5 year), you may be able to get an equity line set up on the remaining 5-10% (if applicable). Equity lines are just secured credit lines. You don't pay for it until you use it. This could be great if you are looking to get into any rental properties, or just to have the security of knowing that rainy day funds are available if need be.
good luck!
Milliken
I like milliken's response, but one thing you may not be aware of, and it may not be of any great concern is that Heloc's are adjustable as well. Though it looked like rates were about to be hiked at next month's Fed meeting, after yesterdays data, a Fed hike could once again be in question. But remember that the index tied to 90% or more of the Helocs out there is the prime rate. When the fed does start to raise, the prime rate will be effected as well. Also, the fact that you have a 2yr fixed and not a 5yr fixed tells me that odds are you probably have a subprime loan. You may have a prepayment penalty attached to your loan. Watch out for that. Finally, if it is a subprime loan, the index it will most likely be tied to is the Libor (aka London Interbank Offering of Rates) traditionally an index slanted toward lenders. When the adjustment period does hit, odds are that ain't adjusting down.
If it were me I'd refinance both loans now with a long term fixed rate mortgage. You're going to pay more in the short-term than on your current arm but you eliminate the rate risk at the end of the adjustment period. Rates are at historic lows, lock in the rate now.
Thanks for all your posts! It really has given me a bit of insight on what decisions and choices I can make next. I truly appreciate it!!