 Check
numbers before refinancing mortgage
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 Dear
Dr. Don,
The current mortgage on my home is an ARM based on the Certificate
of Deposit Index (CODI). It has a prepayment penalty of $1,700 if
I refinance before July of 2007. I am debating on refinancing at
my credit union with a 5/1 ARM at 5.625 percent, but I am not sure
if that would be in my best interest. I do know the (CODI) is only
expected to continue to rise and the interest rate is up over 7.5
percent currently. What are your thoughts?
-- Sue Switcheroo
 Dear
Sue,
Paying $1,700 plus the closing costs on a new
5/1 ARM is a pretty expensive proposition to get out from under
the rate increases associated with your Cost of Deposit Index, or
CODI, loan and into five years at a fixed rate. The longer you plan
on being in the house, the less sense it makes to refinance with
a 5/1 ARM. Try using the "Ask
Bankrate" interactive work sheet on fixed versus adjustable-rate
mortgages to see if the hybrid (5/1) ARM makes sense for you.
Let's say it costs you $3,300 in closing costs plus
the $1,700 prepayment penalty. That's five grand in expenses to
stop rate increases for the next five years. With the current interest
rate spread of 1.875 percent between the 7.5 percent CODI loan and
the 5.625 percent 5/1 ARM, you'll save almost $1,875 per year per
$100,000 of outstanding loan balance, and that's before you consider
any rate increases in the CODI loan.
Bankrate's refinancing
calculator can give you a quick read on how long it will take
you to recoup the prepayment fee and closing costs with a new mortgage.
With a national
average of 6.57 percent, refinancing into a 30-year fixed rate
loan won't get you as quick a payback, but it will keep you from
wishing you had taken that step when the 5/1 ARM becomes an adjustable-rate
mortgage in 2011.
To ask a question of Dr. Don, go to the "Ask
the Experts" page, and select one of these topics: "financing
a home," "saving & investing" or "money."
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