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midgette · Joined: 12 Apr 2006 Posts: 2 0.14 Dollars($)

My wife and I built a new home 2 years ago and finacned by means of 1yr ARM. At the time, rates were in the 4% range. With the recent change in the market, we need to find a suitable refinance option. Our current mortgage balance is $300,000 with a home valuation of approximately $350000. We are considering the IO ARM but wonder how dramatic the payments will change after the IO period ends. Is there any way to forcast that figure realistically? My very reliable and secure income is 60% salary and 40% bonus with an annual income of approximately $110,000. CAn you help me think through all the variables before I decide?

Guest

Its tough to calculate the real outcome but may be some defined calculators can help you.

blue · Posted: Wed Apr 12, 2006 9:52 am Post subject:

Hi Midgette,

I would like to know why you are deciding for an IO option as it can get you into trouble after the payment for the principal amount starts. What are your scores and do you expect a sharp increase in your income within next few years?

IO option to me is helpful if you expect some increse in your income within 5 - 7 years or if you are taking the money for investment purpose.

Why don't you think of a fixed rate mortgage? Did you talk to any lender/broker?

Blue

midgette · Joined: 12 Apr 2006 Posts: 2 0.14 Dollars($)

I was really just doing some research about my options with regard to refinancing our mortgage and came across the IO idea. The main reasons we are looking to refinance is 1-we planned poorly and did not/could not save in the early years fo college tuition. We now have 2 kids in college trying to kill us with college debt; 2- our mortgage payment, because of the ARM rate increase, has likewise increased by 20%. We are currently on track to spend an additional $3600 in mortgage payments this year alone and are looking for a way to improve that picture if possible in the short term WITHOUT damaging the future. I knew there would be a down side to the IO. If you compare the full term of IO -vs- fixed...at the present time what does the final payout interest/principal look like? Is it even possible to forcast that?

blue · Posted: Wed Apr 12, 2006 12:31 pm Post subject:

Hi Midgette,

Interest only loans have become popular these days with the rates going up. Problem is when it comes to pay down your principal the payments become much higher.

I hope the folowing table illustrates your query regarding comparison. The figures are based on $200,000 mortgage -

Monthly payment first 5 years	30-yr Fixed (6.25%) $1,231	5-yr ARM (4.75%) $1,043	5-yr INT. ONLY (4.75%) $791
Monthly payment after 5 yrs	30-yr Fixed (6.25%) $1.231	5-yr ARM (7%) $1,291	5-yr INT. ONLY (7%) $1,413
Total interest	$243,000	$251,000	$269,000

These loans can be valuable if you want to save or invest the money that would have been paid in principal.

Regards,
Blue

Bill · Posted: Wed Apr 12, 2006 3:45 pm Post subject:

Midgette,

I just completed a similar comparison for a customer of mine. Choices included; Interest Only Adjustable Rate Mortgages, Interest Only Fixed Rate Mortgages, Monthly Payment Option ARM’s and the newer 40 year Fixed program.

All loan programs that allow for Interest Only payments have a built-in rate premium that somewhat affect the overall payment savings. Plus, as you mentioned - you are once again putting yourself into a product that will adjust over time.

Although the 40 year Fixed program has a higher rate of interest compared to a 30 year Fixed … the monthly payments are actually very similar to an Interest Only program due to the longer amortization period. Plus there is the built in stability of known payments for 40 years to come.

Having made the 1 year ARM mistake in the past, I would think that the stability of low payments for a long time to come would be quite appealing ... research the 40 year Fixed versus the other options side-by-side prior to making a final refinance program decision.

Best of Luck!

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