My Personal Finance Journey

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Heading for Refinancing

Contributed by mm | March 30, 2004 8:14 PM PST

Since I blogged about my decision (or indecision) in whether to take the refinancing path two weeks ago, I have been closely watching the latest refinancing rate, especially the 5/1 ARM rate in the state of Washington via BankRate. I have seen the 5/1 ARM rate coming down from 3.875% I blogged earlier to 3.75%, then to 3.625%. This morning, EverBank is offering a sexy rate of 3.50% with zero points now.

This makes me seriously reconsidering refinancing now, and it does not take much time for me to decide to move in this direction. If everything runs smooth, I will refinance my current mortgage by the end of April. I expect the deal to save me more than $5,000 in after-tax dollars in the next five years:

1. Comparing to my current 7/23 balloon mortgage at 4.25%, the new rate of 3.50% will give me a saving of $1,860 based on my current mortage balance of $248,000, or a net after-tax saving of $1,395.

2. Although the EverBank deal involves a pretty hefty closing cost of $1,900 ($550 of EverBank fee and others are third-party charges), the payoff is still attractive. The payback is only 1.5 years and after that I have 3.5 years of net gains.

3. Yes, the closing fee mean if rate heads south further, this refinancing will not look like a good deal. But 3.50% is such a great rate, and I don't believe rate will drop even further. Fed will be forced to raise the rate sonner or later and mortgage rate will follow suit too.

4. Applying the same calculation in my "Refinancing Now?" post, my current 7/23 mortage will only come ahead if 5 years from now, the 5/1 ARM rate will increase by a full 2 percent (tax effect considered). Chances are my family will probably not live the full 7-year term in this house.

5. Also, moving from a 7/23 balloon mortgage to 5/1 ARM decreased my risk if I live in this house for more than seven years. I can still cling to a reasonable rate instead of being forced to accept whatever the market rate is after the 7-year term.

6. In addition, EverBank does not require me to put insurance dollars and property tax dollars into escrow account, which will help my liquidity.

There are not many opportunities out there to be able to save $5,000. In light of this, I paid $100 application fee to lock in the rate and head for the refinancing. I will report back if I have any progress in the path.

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