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Hi Jeff,

I currently have a \$346,000 balance on an interest only 5 year 6.375% adjustable mortgage that has 50 months left before it adjusts. Interest is about \$1840/month and I've been paying \$1000 in principle for a total payment of approx \$2840. When the mortgage adjusts the new rate will be 2.75% above a one-year treasury index. With the one-year index in the 1.4% range, if it adjusted today, my new interest rate would be 4.2%. The loan is capped at 11.375%.
My wife and I both have excellent credit, but I am self-employed with lumpy income so we might have to get a no doc loan which would add a point. With all the extras involved in NYC real estate, we are looking at closing costs in the \$3000-\$7000 range depending on whether we'd have to pay the points. Both my wife and I are 40.

OK... I'm going to load your gun, and YOU crunch the nums, OK?

Given your great credit, and your total outstanding balance, you COULD take advantage of the new higher agency (FNMA, FHLMC) loan limits of \$322,700 and get a significantly lower new 5 year ARM mated with an also-lower HELOC. (One caveat; you didn't say what your total LTV is... which will determine your HELOC rates.)

\$322,700 in 5 ARM @ 4.75% (to pick a loosely current market rate) = \$1,277.35/mo interest only.

\$23,300 (o/s balance) in HELOC at Prime + 1% (again, just guessing your situation and approx. market rates) = \$101.94/mo interest only.

Combined = \$1,379.29/mo interest only.
New Monthly Savings = \$460.71/month.
Break Even on \$7,000 transaction costs = 15 months, 1 week. (Year & 1/4)

All considered (and \$7,000 sounds stiff to me, even in NY,) not a bad BEP.

OK... now, \$3,000 - \$1,379.29/mo = \$1,620.71 additional equity improvement monthly.

Crunch that in your ARM amortization table with the rate adjustment assumptions to see your new quickest & slowest payoff expectations ;~)

I ran the numbers and came up with these two extreme scenarios based on my making a flat \$3000/month P&I payment (my planned minimum payment regardless).
1) My rate never goes up. I pay off the loan in 15 years 6 months.

Are you remembering to factor the dropping interest each year as the loan is reset at the annual interest level times the THEN CURRENT principal balance? Just to be accurate (if you hadn't considered it,) it accelerates the payoff a bit more in reality.

2) At the adjustment date, my rate goes to the max 11.375% and stays there forever. In that case, I pay off the loan in 24 years 6 months.

IMPORTANT POINT OF CONSIDERATION HERE:

If you were to refi to a CONFORMING 5/1 ARM, you could get;

1) Cap rates of 2-2-6 (max initial adjustment of 2%, annual max 2% thereafter, 6% life max.)

2) Margin of 2.25% instead of 2.75%

3) Index on LIBOR instead of US Treasuries. (It's guesstimated that LIBOR will trail US Treasuries in rebound as global economies are generally assumed to trail the US economy in recovery.... but that's anybody's guess of course.)

Hope that helps with the considerations.
Cheers,
Dave Donhoff
National Mortgage Broker/Banker

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