Low interest rates make it hard to pass on refi

Q: I have a cou­ple of ques­tions.  First, I’m look­ing into refi­nanc­ing my mort­gage. I’m being offered the 3/1 VA Hybrid at 2.5%. Is this a good deal? I’m PCS­ing in one year. Sec­ond, I’m told by the loan offi­cer that I can buy another house using VA loan when I PCS even though I’m rent­ing my cur­rent home using a VA loans in another state. Is this true? I’ve read the info but I’m con­fused. Thanks!
–Jun, O’Fallon, Illinois

A: One pos­i­tive of the eco­nomic tur­moil of the last few years is that inter­est rates remain his­tor­i­cally low. This cer­tainly makes it an excit­ing time to take a close look at refi­nanc­ing. Is a 3/1 Adjustable Rate Mort­gage (ARM) a good deal? Well, it depends. 

With a fixed rate mort­gage it’s fairly easy to deter­mine if refi­nanc­ing makes sense. First, you deter­mine how much it will cost to refi­nance (clos­ing costs, points, etc.). Sec­ond, you esti­mate how long you will have the mort­gage. Then you deter­mine if you save enough in inter­est over the given time period to jus­tify the cost of refinancing.

With a mort­gage like you are con­sid­er­ing (3/1 ARM), it’s a bit more chal­leng­ing because you also have to project what’s going to hap­pen with inter­est rates. With a 3/1 ARM you know what the inter­est rate and your pay­ment will be for the first three years, how­ever, after that the inter­est rate could adjust and increase your pay­ment.  In a low inter­est rate envi­ron­ment like we have this type of loan is nor­mally suit­able if you’re fairly cer­tain you’ll be get­ting rid of the mort­gage before the three years is up.  It sounds as if you may plan on own­ing the home for much longer than three years? If this is the case, you might con­sider a 30-year fixed mort­gage. Rates right now are around 3.5%–just writ­ing that has me shak­ing my head. On a $150,000 loan the dif­fer­ence in the prin­ci­pal and inter­est pay­ment between a 2.5% and 3.5% loan is less than $80 per month. That might be a small price to pay for know­ing exactly what you can expect in the com­ing decades.

It is pos­si­ble to have two VA loans at one time. You may be able to use a VA loan to buy your pri­mary res­i­dence when you get to your new duty sta­tion. How­ever, since you’re already using part of your enti­tle­ment in the prop­erty you live in now, that will impact the amount of the VA loan guar­anty avail­able for your new home. Your loan offi­cer should be able to tell you, given the actual num­bers, if what’s left of your VA enti­tle­ment would be ade­quate for your next pur­chase.  Good luck.