Actually, I’m pretty excited that our adjustable mortgage rate reset. A couple months ago, I wrote all about the details of our two mortgages. To recap, our primary mortgage, which is about $300,000, is a 5/1 interest-only ARM mortgage. The “5” means it resets after 5 years. That happens to be NOW!
As an aside, although we paid almost $400,000 for our house, we do live in the Washington D.C. area, which is very expensive, and our house is an old cape cod style from 1941. I just want to make sure you have everything in perspective, especially if you live in a more rural area where houses are MUCH cheaper.
So last week, we got the letter from the mortgage company stating our new rate. Previously, our rate was 5.25% for the first 5 years, but the new rate is Prime + 2.25% (rounded to the nearest 0.0125%). I’ve been following the prime rate, which is based on the 6-month LIBOR rate, for the last year and it just kept going down.
A year ago, it was around 3%, which would have put our new rate right at 5.25%; the same as our old rate. But as of the first day of the month, which is when they picked the rate, the 6-month LIBOR was at 0.56%.
0.56% + 2.25% = 2.875% (rounded up)
That rate is good for the next 6 months. After that, the next rate change is capped at 2%, so it will only go up to at most 4.875%, which is still a savings.
How much do we save each month?
Our current interest payment (since it’s an interest-only loan) is about $1400. Yeah, that’s a lot of interest each month. Our new interest payment will be about $800.
We’ll be saving about $600 per month in interest for the next 6 months! That’s a buttload of moolah! That’s $3,600 over those 6 months.
What will we do with the extra money?
That $3,600 could buy me a beautiful TV as a graduation present next month, but we have other plans. More responsible plans.
Instead, we’ll just keep sending that $600 to the mortgage company each month. But this time it will go towards principal, not interest. And since our 2nd mortgage is about 8%, we’ll apply it to that loan, not the 1st mortgage. In 6 months, our mortgage will be an additional $3,600 lower, along with other overpayments we’re planning.
What about refinancing?
We have to refinance eventually. Rates won’t stay this low, but we’re kind of stuck. House values have dropped and, at best, we could only break even on a home appraisal. I applied for a refinance about 6 months ago to test the waters, so I know we need at least 10% equity in our home to get a decent rate, but right now we only have about 5% equity.
Honestly, we don’t have a plan yet for refinancing. And while we’re locked in under 5% for at least the next year, I’m not in a big hurry. However, I’ll be monitoring the rates, but unless home values bump up a bit too, we’re a bit out of luck.