Should my parents refinance to fixed rate mortgage?

[treestar]

In 2005, my parents got an ARM mortgage on their home, which is now underwater. They don't speak English very well and are not financially savvy. Now that I am old enough to know what's going on, I'm trying to help them with refinancing.

They're 7 years into their ARM. Their rate is adjusted every year (in April) based on the Treasury Security index (TCM) + 2.75% margin. They have about $200k in principal.

They recently got an offer from their current lender to switch to a 30-year 3.625% fixed loan (no closing fees).

Should they go for the fixed 30-year loan?
They're in their 60's now but I think they would like to live there as long as possible.

I don't know much about mortgage loans and this is a little overwhelming for me.
Any advice would be much appreciated

[Blessed]

What is the value of the home and what do they owe on it? Thirty years is a very long time at 60.

[disneysteve]

Are they eligible to refi if they are underwater on their loan?

[treestar]

They owe $200k and the house is currently valued at $190k.

Even though its underwater, since they have never been late on their payment their current lender (chase) is offering this to their good customers to hold on to them.

I know 30 years is a long time at age 60 but then 23 years (what's left on current loan) is too...

[disneysteve]

They owe $200k and the house is currently valued at $190k.

Even though its underwater, since they have never been late on their payment their current lender (chase) is offering this to their good customers to hold on to them.

I know 30 years is a long time at age 60 but then 23 years (what's left on current loan) is too...

I don't think the length of the loan is relevant because that doesn't mean they need to take 30 years to pay it off. I think the bigger question is why a couple in their 60s still has a 200K mortgage? What are their retirement plans? What do they have in savings? Are they going to be able to have this paid off before they stop working?

[sblatner]

Do you know what interest rate they are at now? (What is TCM plus 2.75%?)

I would say there is some value to going to a fixed rate mortgage even if they increase the length of the loan especially if it is truly a no cost loan and their payments would go down.

My parents are 76 and bought a place 18 months ago. They have a 30 year mortgage. They were renting before so just consider their mortgage rent.

[Petunia 100]

In 2005, my parents got an ARM mortgage on their home, which is now underwater. They don't speak English very well and are not financially savvy. Now that I am old enough to know what's going on, I'm trying to help them with refinancing.

They're 7 years into their ARM. Their rate is adjusted every year (in April) based on the Treasury Security index (TCM) + 2.75% margin. They have about $200k in principal.

They recently got an offer from their current lender to switch to a 30-year 3.625% fixed loan (no closing fees).

Should they go for the fixed 30-year loan?
They're in their 60's now but I think they would like to live there as long as possible.

I don't know much about mortgage loans and this is a little overwhelming for me.
Any advice would be much appreciated

I think they should take this refi offer. What an awesome, low fixed rate. While their ARM is likely at a low rate now, it is likely to rise significantly over time.

Just because it is a 30 year loan doesn't mean they must pay it off over 30 years. It is easy enough to use a payment calculator (like the one at bankrate.com) to calculate any payoff period they like. For example, if they are concerned about going from 23 years remaining to 30 years remaining, use the calculator to determine what they need to pay each month to pay the new loan in full in 23 years.

Large banks such as Chase are making these offers right and left. Definately take advantage. It is unusual to be offered no-cost refis on upside down loans, it is only happening now because of certain government programs (HARP) and the recent National Mortgage Settlement.

I closed on my no-cost refi with Wells Fargo on June 30th of this year. Mine was through HARP. It really was no cost. My principal balance went up only the amount of my new escrow account plus 1 month's interest. I skipped July's payment and received a refund on my old escrow account, effectively I was reimbursed for the amount my principal balance increased. I got a higher rate than your parents are being offered, but I am much more upside down than they are so that was reflected in my rate. Plus, rates are a bit lower now than they were last June.

[YLTL_Dan]

Yes, refinance if they're eligible as rates are incredibly low right now. They could stay this way for ten years, or they might start jumping up next year. It's too hard to say, but since your parents are probably on a fixed income, they can't take the risk.

Could they afford to do a fifteen year loan? Usually, this will get them a better interest rate as well. Based on my calculator on $200k at 3.68%, their payment would go from $918 on the 30 to $1447 on the 15 year and that doesn't include the potential savings from a lower interest rate.

[treestar]

Their current rate is at 2.875% I think.. It's a little confusing for me too but it says that the margin is 2.75% + the index (currently) is 0.15.

Monthly payment is currently $1,007.
If they go with the re-fi then the new monthly payment would be $917.

Unfortunately, I don't think my parents have a retirement plan. They only have about $50k saved. They do own a small business which is probably worth about $120k.

I doubt they'll be able to payoff the house before they stop working so I guess like sblatner said, maybe they should just go for the fixed rate and consider it rent..?

[treestar]

YLTL_Dan, I wish they could do a 15-year but I think it would be too much of a financial burden. And when I talked to the Chase guy, he said the offer is only good for 30 year fixed... otherwise they will charge closing fees.

Thank you everyone for your advice. I will def be talk with my parents today and hopefully they can make the best decision.

[phantom]

Would your parents consider moving to a smaller, more affordable place at some point? If so, I would suggest sticking with the current mortgage. They'll find themselves right side up in the house much more quickly if they stick with the lower interest rate and the higher payments. Closing that $10,000 gap should be possible in just a couple of years. Then, once they're right side up, I would suggest selling and either buying a less expensive house or finding a less expensive place to rent.

I would only refinance if they're set on remaining in the house for the rest of their lives and if they are fairly certain that they will continue to be able to afford the $917 payments indefinitely. If they're not going anywhere, locking in a low rate before rates jump up definitely makes sense. But, since it will hurt them in the short term, I would not do it unless they're pretty certain they're staying put.

[snafu]

When your parents re finance their mortgage, it re-sets the contract. If you look at a mortgage amortization table you will see that for the first several years nearly all of the monthly payments go to interest and only a small amount goes to the principal. It takes many years for the majority of the monthly payment to go to the principal and the smaller sum to interest.

I've no crystal ball but believe it's likely that interest rates will increase, they seem unsustainable based on historical rates. A lockedin mortgage rate seems like a good move.

I suggest that your parents accept the new mortgage making the required $ 917. payment on the mortgage but continue using the old sum of $ 1017. to create $ 100. per month to be applied directly to the principal if possible. That will make a difference in reducing the principal. If your parents are in reasonably good health and take care of themselves, it could be reasonable to have them in their home to age 85.