Renegotiating a mortgage

My lender recently sent me information about renegotiating my loan.  They boasted being able to offer me a five-year fixed payment at 1.75% (APR 4.704%).  This would lower my monthly payment almost half.  They claim that this renegotiation is possible in part due to the incredible increase in the equity of my home. 

Obviously, this offer sounded too good to be true.  I contacted a good friend of mine in real estate and asked him about the offer.  He told me to throw it away but if I was curious to find out what the catch was. Here’s the catch, for anyone who ever receives this and is tempted or curious.

First, this renegotiation loan is called an Option Arm Mortgage.  Under this mortgage there are four options of payment that you can opt in on.  They are the following:

1.  Minimum payment requirement is 1.75% of the mortgage, which is fixed for five years.  Under this model, interest is deferred.  The catch here is while you are saving money up front, the deferred interest is accruing on top of the loan amount.  This means, at the end of five years, your monthly payment will be 4.704% + any market adjustment (up to a Max annual cap of 1.5) of the remaining balance of your loan.  Be careful, by deferring interest you are creating a larger payment later.

Use this option only if you are strapped for cash, needing an equity line of credit without applying for an equity loan.  Could this option be good if one planned to sell the property before the five-year period ends? I assume you cannot deduct on your taxes the full interest if you’re only paying part. but what are the gotcha’s for this case?

2.  Interest only payment.  This is your typical loan arrangement (in my opinion, not worth a renegotiation).
Use this option only if your interest rate is a lot higher.

3. 30-year principal and interest.  You could probably get this arrangement with your current loan and not need to renegotiate.

4.  15 your payment, again, not unlike a refinance at this point.

 

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About Audrey Sniezek

Audrey Sniezek is a rock climber, climbing coach, computer software/technology enthusiast and occasional baker/cook and wine connoisseur.
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One Response to Renegotiating a mortgage

  1. John says:

    If your current lender is trying to get you to renogtiate a loan I would generally be very wary, as it is likely to be in their interest.
     
    If option 1 is actually structured so you are paying the interest, but they lend you the money to make the payment you might be able to deduct it (thought I am by no means a tax attorney).  I a higher tax bracket that could almost get you cash flow neutral, but I would not suggest that route unless you were strapped for cash, planning to sell within 5 years, and fairly confident in the value continuing to increase, otherwise just sell now and move somewhere you can afford.

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