Financing in Philadelphia>Question Details

Kristina, Home Buyer in Philadelphia, PA

5/1 or 7/1 or 10/1 ARM for refinance? I want to sell in a few years. When will the market bounce back?

Asked by Kristina, Philadelphia, PA Sun Feb 12, 2012

We bought a house in Philadelphia as 1st time home buyers in 2009 and have a 30year fixed rate of 5.125. After 2.5 years we are looking into refinancing since the rates are low. We are considering a 30-year loan with 5/1 or 7/1 or 10/1 year adjustable rate. We are actually moving away to a different continent so we want to rent the house. I don;t know whether we will ever come to live in this city (it is possible but far from certain). We want to sell the house after the low interest rate is over (5 or 7 or 10 years). The house prices dropped in Philadelphia, so we need to wait some years to make profit on the sale. Are there any predictions about how many years will the houses keep dropping? Should I take 5/1 or 7/1 or 10/1 ARM? Thank you!

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Kristina’s answer
Thanks!

We chose 10/1 ARM just to have enough time to make our decision. We will try to rent the house for a few years and then try to sell. Nobody knows if the market will continue falling or will start appreciating again and how many years will this take. So much in life depends on luck!!!!
0 votes Thank Flag Link Fri Mar 30, 2012
You have omitted what the cost will be to refi for the ARM's. You have a 5.125% now and say you want to rent the house for some period after you move out. If I was you I would think long and hard about refinancing at all but you certainly have to work the numbers and play the "what If" game to see what works and what to avoid. I can 100% assure you that in 5 years rates will be up over 5% and those ARMS will be rising each year, most likely, you may wish you still had that fixed rate at 5.125%.
1 vote Thank Flag Link Sun Feb 12, 2012
I agree with Tim, in 5 Years your rates will definitaly increase.
Have you thought of a 7 Year fixed Arm? There may be a pre-payment penalty for the 1st few years...

All the best, John RE/MAX 215-757-2889
Web Reference: http://www.HomeCatch.com
0 votes Thank Flag Link Thu Mar 29, 2012
Again, choosing the 5,7, 10 ARM depends when you want to sell. The more you wait the more principle you have paid off and thus the more money you will recieve at settlement. As for the money you invested into the property it depends on what improvements it went towards if that is what you are referring to. If it went towards a kitchen the kitchen will be out of date in 10 years if you sell then. If it went towards central air that offers a bit more appreciation but not a large amount. I would mange your expectations with seeing a return on the additional money invested into it.

As for utilities you should always have the tenant set up the utilities in their name and pay them.

Again looking at your situation broadly you should make out alright. If you are trying to zero in on what your house will be worth in 5/7/10 years you are going to frustrate yourself. Focus on the beauty of the low rates and the equity you can build with it. Focus on the financila vehicle that it is especially becasue you have a tenant paying your principle for you.
0 votes Thank Flag Link Tue Feb 14, 2012
Another question if you don;t mind: when you say that we should be able to get $1200-1500 in rent do you mean with utilities included or excluded? In a big house utilities are more expensive. Thank you so much for all your advice.
0 votes Thank Flag Link Tue Feb 14, 2012
Also I should mention that we invested about 30k to this property so we would like to recover it when selling.
0 votes Thank Flag Link Tue Feb 14, 2012
Thanks again. Yes, I was thinking along the lines you wrote down: to get a new mortgage for about $765 and with taxes and insurance pay about $1000/month. Charge rent 1200-1400/month + tenant responsible for all utilities. Number $4445 is total settlement charge for my new refinancing (escrow 1570) that I will add to the mortgage. Does that seem high? Would you choose 7/1 arm or 10/1 arm (interests 2.875% or 3.25%) when I am looking to make most money on the sale in the future?
Thank you for advice.
0 votes Thank Flag Link Tue Feb 14, 2012
Closing costs to sell a home are 8% if you are listing with a real estate agency. 6% as a commision and 2% for the transfer taxes. Are the amounts you are referring to in relation to refinancing?

You are correct in saying prices vary in 19119 due to the locations ie. Mt Airy vs Germantown. You should see stable growth there in the years to come. In addition prices in some parts of 19119 have help up fairly well. It is also fantastic you put what looks like 20% down when purchasing the house. In 5 years your note should be around $162,000 if you choose a 5/1 refi (using 2.99% ). Even if you sell it for what you purchased it for you'll come out with some gain. And your renters are paying the mortgage and principle for you. Or you think longer term and keep paying the principle off with a renter.

With a principle and interest in the $750-775 range after refinancing + taxes and water you should be able to charge $1200-$1500 in rent.
0 votes Thank Flag Link Tue Feb 14, 2012
Thank you. I bought for 245,000 in zip code 19119. I owe 182,000. It is very hard to predict how much the houses dropped in my neighbourhood. There are houses for 500k and for 80k too. How much is a good cost of the closing cost/settlement charges? With my lender it is coming to 4445 (my escrow is 1570). Thanks.
0 votes Thank Flag Link Tue Feb 14, 2012
I see, so you are not comfortable with carrying a 15 yr mortgage and you feel the rent would not be able to cover this to my previous point. I do want to emphasize that the market in Philadelphia really is not bad right know however if you purchased 2.5 years ago it's obviously not going to benefit you to sell for a few years.

I would manage your expectations with the amount of profit you will make but based on averages and loan amortization if you refinanced right now with a 5/1 you should have about 13-15% of your original principle paid off. This is not including fees to refinance. Then of course you have closing costs when you resell. However, I did not calculate appreciation and depending on the neighborhood and house you are in you should see some.


If you give me some more concrete facts about house price and neighborhood, new construction vs. rehab. I can play out some scenarios for you. How much do you believe your house has dropped in value? Clearly taking advantage of the refinancing options right now can benefit you other then that you seem to be asking how long do you consider waiting out to sell.

Best,

Carl Caldas
CITYSPACE
ccaldas@phillycityspace.com
0 votes Thank Flag Link Tue Feb 14, 2012
Thanks for answer. However I don't want to risk so much (take a 15-year mortgage). I am moving to Europe and I want to make sure that the mortgage is covered from the rent. I made sure that renting my house is ok with the lender (all lenders in Phila were ok with it as far as I don;t buy another house and claim it to be my primary residence). My husband claims that we will not come back to live in this house even if we moved back to USA one day. So my question is- I want to choose a mortgage with a very low interest rate so my monthly payments are low enough. Then the rent collected will be enough to add a good amount to the principal every month. I want to choose the term of the adjustable mortgage so that the house value goes up at least a bit in these years so that I can sell and have profit (not loss). I know that it sounds like all the greedy people that caused the crisis. If I could choose I wouldn't do any of this but rent but unfortunately I am a home owner now.

The market is so bad and unpredictable right now- prediction is that it will stay low for another 2 years. I would like to make profit on the house sale in order to have enough for a downpayment in the future (I am ok to wait for 5-10 years to accumulate enough money) How many years do you predict to wait to get good equity in the house and max profit from sale?
0 votes Thank Flag Link Tue Feb 14, 2012
Rentals are strong in Philadelphia and will remain so. If you were ambitious to refi I would recommend a 15 year mortgage. Most importantly could you carry a 15 year mortgage? Secondly does the market rent equal 15 yr note payments? Or are you not concerned with this?

Right now 15 yr mortgages are very close to the 5/1 arm interest rates and are a more secure refinance amount. I would take advantage of it. Take your situation with a 100k mortgage example: after 2.5 years (30 mos) at 5.125 % you have paid about $3750 in principle, leaving you with a $96, 250 mortgage balance. Refinancing for 15 years at 3.25% after 5 years you will have $27,000 in principle leaving you with about a $69,000 mortgage balance.

Depending where your house is in Philadelphia and if your mortgage balance is between $70,000 and $350,000
there is a good possibility the rent collected could cover the payment. Don't hesitate to reach out and discuss.

Carl Caldas
2200 Walnut St.
Phila, PA 19103
215.625.3650
ccaldas@phillycityspace.com
0 votes Thank Flag Link Mon Feb 13, 2012
Thank you for answers. My situation is that I got a good job in another continent. I want to move there with my husband. As the houses in my area (Philadelphia) dropped in the last 2 years it does not make sense to sell now. Also we might come back after a few years but just might. My interest rate is not bad but the current one is much better. I used mortgage calculators and all the current rates including a new 30 year fixed (at 4%) make it a better deal than what it is now (assuming that the house will appraise decent which I expect). I will save from from $180 to $330 monthly depending on the type of loan I choose (at least from 5 years with 5/1 arm). I remember that my current lender said that it is officially not allowed to rent my house but that if I want to do it I just should not tell them. BTW what are the consequences that you are talking about?
0 votes Thank Flag Link Sun Feb 12, 2012
Tim is very accurate:
In addition;
Have you worked with a Mortgage Calculator to determine if it is worth doing a Re-Fi; will it cost you more than you save, 5.125 is not a bad rate.
Also, does your present Loan allow you to Rent it out; that could have serious consequences.

As far as appreciation goes, we are starting to see spotty and sporatic increases, as would be expected: The whole Market will not pick-up and increase all at once. There will also be some dropping. Again, it comes down to Location, Location, Location!

Good luck and may God bless
0 votes Thank Flag Link Sun Feb 12, 2012
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