Time to revisit my Option-ARM
June 28th, 2006 by KenricSFH#2 is officially rented. At the same time my tenant is leaving Condo#1 tomorrow, he is leaving a month early but is still paying for the month of July. I already have Condo#1 rented starting August 1st, it pays to start advertising your rentals early!
Townhome#2 has an option ARM loan. For those not familiar with this type of loan, you have 4 different payment options. The lowest payment is a negative amoritization payment, also known as neg-am. If you pay this amount, you are basically saying I’m going to pay you only part of the interest I owe you this month, please add the rest of the interest to my loan amount. If you pay this amount, your loan balance will increase. The next payment is the interest only option, you pay full interest and pay down no principal. The 3rd option is a full principal & interest payment based on 30 year amortization. The 4th is full P&I based on 15 year amoritization.
Option ARM’s continually adjust every month. Mine is based on the 12 month MTA average. My payment for this property has been creeping up every month. It goes up about $15-$20 a month. It started at around $630 and is now at $780.
I’ve decided that I’d like to keep this property as a long term hold so I need to get my rate locked down. The problem is that I’m pretty sure I have a prepay penalty on this loan. I just can’t remember if its a 1 year or 3 year. I’d like to refi it into a fixed rate loan.
Update: I have a 3 year soft prepay penalty on my loan. The pre-pay penalty is equal to 6 months of interest, or about $4,500. If you divide that by the 24 months left its about $190/mo. That means that my refi rate would have to be so low that I would save $190/mo in payments. That’s not going to happen.
BTW, a soft pre-pay is a penalty only when you refinance. I can sell my property with no pre-payment at all. A hard pre-pay penalizes you when you refinance or sell.
Posted in Finances | 
Stumble it!
I have an Option-ARM on my rental as well. It has a 1yr soft prepay, and I am thinking of converting it to a fixed rate loan when the year expires in August. I can’t recall the starting point, but it has crept up 1/8% to 1/4% every month since last August. It’s now at 8%. It was nice for that short time, but my broker then was hailing it as the best thing since sliced bread. At this rate, I’ll be paying 11-12% by this time next year! No thanks!
By Steve on Jun 28, 2006
I have a similar dilemma with the house we live in. We used an ARM to buy the house, but have had to wait to refi until the pre-payment penalty expires, which is this October. The issue is this–we want to sell in May. So, is it worth it doing a refi??? I don’t know. I’m waiting until September to decide. I’m passing the buck onto my future self.
By Trisha#1 on Jun 28, 2006
trisha,
If you are going to sell it’s almost always a losing proposition to refi. Refinancing is always a simple math formula. All you have to do is plug in the numbers. If you are selling in May, it is 8 months. So take 8 months and multiply by the dollars saved per month by the lower refi payment. If that amount is greater than your closing costs for refinancing then go for it. That being said, a typical refi may cost you $3,000 so you’re payment would have to be at least $330 lower to make it worthwile.
By monarchcrest on Jun 29, 2006