Need advice - How to compare loan criteria

[phxphun]

I'm approved for a cash out refinance and have two loan quotes.  I'm looking for advice on how to compare the two options. Can anyone point me to an article or calculator that would help me decide which option to go with?   Ultimately, of course my refinance goal is to spend the least amount as possible on the house over the next 8 years.  

Current loan balance is $344,000.  

Current interest rate is 3.375%.

I'm taking $15,000 cash out with the refi.

Credit score is 809.

We plan to sell the house in 7 - 9 years.

Option 1 -

Type:  5/1  ARM  2-2-6, 30 yr 

Loan Amount:  $365,000

Interest Rate:  2.875%

Loan Costs:  $2,751 

Option 2 - 

Type:  7/1  ARM  5-2-5,  30 yr

Loan Amount:  $365,000

Interest Rate:  3.000%

Loan Costs:  $2,751 

Any advice is appreciated.

[ezdriver]

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@phxphun wrote:

I'm approved for a cash out refinance and have two loan quotes.  I'm looking for advice on how to compare the two options. Can anyone point me to an article or calculator that would help me decide which option to go with?   Ultimately, of course my refinance goal is to spend the least amount as possible on the house over the next 8 years.  

Current loan balance is $344,000.  

Current interest rate is 3.375%.

I'm taking $15,000 cash out with the refi.

Credit score is 809.

We plan to sell the house in 7 - 9 years.

Option 1 -

Type:  5/1  ARM  2-2-6, 30 yr 

Loan Amount:  $365,000

Interest Rate:  2.875%

Loan Costs:  $2,751 

Option 2 - 

Type:  7/1  ARM  5-2-5,  30 yr

Loan Amount:  $365,000

Interest Rate:  3.000%

Loan Costs:  $2,751 

Any advice is appreciated.

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I think that they are similar enough that either will work for you. With Opt #2, you get an extra 2 yrs of known rate/payment. I'n not sure what type of calculation you intend to do to achieve which objective... but how long you plan to stay in the house is probably something to consider.

[StartingOver10]

What is the margin and index for each loan?  

This should be disclosed to you upfront. Here is an easy definition for both: http://www.investopedia.com/terms/a/armmargin.asp

[phxphun]

Thanks ezdriver.   I'm really just wanting to know which option is most likely to end up being the least costly over the 8 years we'll be in the house...  all things considered, (loan costs, interest rate for first 5 or 7 years, rate change at first adjustment, etc).  

[phxphun]

Thanks StartingOver10.  

The 3.0% 7/1 ARM has an APR of 3.292%.   The APR for the 2.875% 5/1 ARM is 3.313%.  

I don't see margin stated in the quotes...  I'll have to ask.  Thanks for pointing that out.  

Are these caps typical?  Can they be negotiated?

7/1  5-2-5

5/1  2-2-6

[StartingOver10]

What are the caps specifically? not just the short hand version of them.  

You have to know both the margin and index for each loan because it makes a difference on which is better for you and they might be different even if they are offered by the same lender.  

[phxphun]

Thanks again StartingOver10.

Caps for the 7/1 are 5-2-5:

The 7 means the 1st year after the 7 year fixed portion, cap could fluctuate up or down 5% maximum, but not higher or lower than 5% plus the rate. The 2 means any year after the 1st yr it can fluctuate with a maximum increase or decrease by 2% higher or lower than the current rate at that time. It will adjust once a year for the remaining life of the loan. The 5 is the life cap the rate cannot extend more than 5% of the start rate which is what is on the quotes.

Worst case scenario after the 7/1 if rates went up would be 8%.

Caps for the 5/1 are 2-2-6:

The 2 means the 1st yr after the fixed portion 5 yrs the cap could fluctuate up or down 2% maximum but not higher or lower than 2% plus the rate. The second 2 means each year after the 1st yr it can fluctuate with a maximum increase or decrease by 2% higher or lower than the current rate at that time. It will adjust once a year for the remaining life of the loan. The 5 is the life cap the rate cannot extend more than 6% of the start rate.

Worst case scenario after the 5/1 if rates went up would be 8.75%.

The rate is based off the LIBOR index.  Libor currently being at 1.227.

The margin is 2.25.

Are these caps typical?   How do I evaluate the margin and index?

[ezdriver]

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@phxphun wrote:

Thanks ezdriver.   I'm really just wanting to know which option is most likely to end up being the least costly over the 8 years we'll be in the house...  all things considered, (loan costs, interest rate for first 5 or 7 years, rate change at first adjustment, etc).  

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You can only calculate the actual cost of the 5 or 7 year period that the rate is fixed. Beyond that timeframe, the index will vary and your annual rate [therefore costs] will vary annually accordingly. It is anyone's guess what your cost will be beyond the fixed-rate period of the loan. The bestthat you can do for each year beyond the fixed-rate period is to use the annual cap to set the rate for each year and then calculate your payments accordingly.

By the way, this is not an unreasonable exercise to ask your loan officer to do ... project calculated costs for x years using the annual cap as the max rate.

Hope this helps.

[StartingOver10]

Agree with EZ, have your LO compare costs with you.

Also here is a link for comparing various types of indexes (indices??) so you have an idea there is also a link for historical changes for these indexes.

http://mortgage-x.com/general/mortgage_indexes.asp

Margin is self explanatory