Cutting your ARM off at the knees: Is it time to refinance...?

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Lately our apartment-owning friends have been percolating about refinancing: They are wondering whether now is the right time.

Those recently severed from their upwardly-mobile real estate aspirations bring an undertone of capitulation to the discussion, like a new parent turning in the keys to the convertible.   Similarly, having a few more years left on an obscenely low 10/1 adjustable-rate mortgage doesn't exactly make you eager to trade up to a higher rate.

Even owners who can save money right away are tempted to enjoy the summer and see if the rates come down later in the year.

Or not.

A conversation with Melissa Cohn, a mortgage broker and president of The Manhattan Mortgage Company, the largest mortgage originator on the East Coast, offered cold comfort to dawdlers.

“Rates are low right now, but they will go back up,” she predicts.  “The bottom line is once the economy begins to recover, we’re going to have to find a way to pay back all this money the government has spent and it’s going to cause inflation, which causes interest rates to go up.  By next year that’s definitely going to happen.”

Of course, not everyone agrees that inflation is around the corner. But Cohn notes that as of yesterday, the best rate for a 30-year-fixed conforming condo or co-op loan was 5 1/2 percent with no points--half a percent higher than 10 days ago.

“Refinance now if you can go from adjustable to fixed at a comparable rate, like going from 4 7/8 percent five-year ARM to a 30-year-fixed 5 percent loan without points," she advises.

If you have a fixed mortgage, she says, refinance now if you can lower it by at least three-quarters of a percentage point and you plan to stay put for two or three years to break even on the closing costs.

She says boards are being reasonable with approvals so long as owners aren’t taking out money and increasing the size of the loan. In that case, they require stricter income and asset documentation.  

Most banks will lock in a rate for 60 days, but due to a wave of refinancing, loans are taking more like 90 days to close. The holdup should ease by the end of the year as banks staff up, says Cohn.

“And I don’t think you have a risk that if you start now and lock your rate in 30 days it will be a whole percentage point higher,” she says.

Are you refinancing? What kind of deals are you finding? Can you recommend a bank or a mortgage broker?