The Perfect Ten Year Mortgage

Posted by Madison on June 26, 2008

It’s not exactly perfect, but I found something pretty close. We just refinanced with a 5/5 Adjustable Rate Mortgage. The terms actually equate to very inexpensive 10 year mortgage if you choose to use it that way.

Adjustable Rate Mortgages

We previously had a 5/1 adjustable rate mortgage. I discussed our original reason for having an adjustable rate mortgage before. However, I wanted to refinance to take advantage of the lower rates and to position ourselves for any upcoming changes in the next few years in our business plans.

We spent awhile rearranging our finances to refinance the house.

5/5 ARM

I was considering a 30 year fixed, but stumbled across the 5/5 adjustable rate at Pentagon Federal Credit Union.

Here are the details of the product:

  • The rate is fixed for the first five years.
  • It adjusts each 5 years.
  • The cap at each adjustment is 2% each way.
  • The maximum adjustment is 5%.

Comparison to a Fixed Loan

I won’t repeat all the math here, as someone at Fatwallet already computed it in a handy spreadsheet, but the break even point for the 5/5 ARM versus a fixed 30 year loan is just after 10 years. That time frame should work perfectly, as we don’t have any plans to move in the next 5-7 years.

In addition, it coincides nicely with our dollar plan ending 8.5 years from now, so we would have the option to pay it off if the second adjustment took a turn for the worse in 10 years. For a 10 year mortgage, it seems to be a perfect balance of risk and reward.

Lender Requirements

Here are some of Pentagon Federal’s lending rules when we applied:

  • Total debt-to-income ratio is 50%
  • 75% LTV or less to waive escrow (or manager approval)
  • 80% LTV or less to avoid PMI

They waive almost all the costs in their no closing costs program. (Unless you refinance an existing Penfed loan).

Details and Our Savings

Rate Lock. We locked a 5.125% with .125 points.

Closing Costs. Closing costs ended up at $1235, or $314 less than they initially estimated, which was a nice surprise.

Change in Loan Terms. We switched from a 5.625% rate to 5.125%. We cut 8 years off our loan and our payment only increased $52.

Savings. We will save approximately $240,000 if we keep the loan for the entire term.

Action Plan

We had to close our HELOCs because the appraisal came in about 7% lower than 2 years ago. (Although, I’m a little skeptical of the appraisal.) We’re in the process of reopening our HELOC…. ah, the fun never ends!

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