How to model an ARM refinance

I’d like to model an adjustable rate mortgage refinancing and need guidance.
My current mortgage payment is $2037 with a loan balance of $246,000. I wish to model an ARM 5/1 refinance: first 5 years a $1000 monthly payment in which principle and interest are roughly equal. The 2015 loan balance is $246,000 and paid off under a single $216,000 payment in 2020 (5th year). I propose modeling in two steps:
1 Primary Home/Current Home: Balance = $30,000 (First 5 year principle pay down is $500/mo * 60 months), Monthly Payment = $1,000, Years = 5.
2.Loan pay off under a single payment of $216,000 ($246,000-30,000) in 2020.
Would appreciate feedback on the appropriateness of this approach. How should I model an ARM? Thanks!

Comments

dan royer's picture

If you make the span of the mortgage 5 years, it should have the same effect overall of paying things off at the end of the 5 year period. You could also use special expenditures with appropriate tax consequences to model part of this?

My first attempt was what you suggested: In the Mortgage screen Bal=246000, Yrs=5, Mo Payment=1000 (Actual payment under the ARM teaser rate for the first 5 years). When "Add", the program refuses and gives error message "Monthly Payment is too Low". The lowest payment that is accepted is $4100 which equates to an interest rate of "0%" (4100/mo x 5 yrs = 246000).

How does the program treat the interest cost associated with a loan (when mortgage 'i' is not an input)? The only 'i' input I find is on the Purchase of New Home screen. To do a refinance analysis do I have to "newly purchase" my home under unique profile with the proposed loan of the refinance? If so, how do I model an ARM?...the way I originally proposed in this post?:a 5 yr loan at its teaser rate and then a special expenditure in year 6 to pay off remaining balance? Thanks, Craig

Dan --- I may have figured out a way. Does the following make sense?:
Step 1) Create a duplicate profile under which the present home mortgage is zeroed out (Actual loan balance is $246,000).
Step 2) In this duplicate profile set up a 5 year ARM loan by purchasing a home under Vacation Home/First Change…/Purchase New Home screen to model the ARM parameters
a) Purchase Price: As purchase price, input principle portion paid monthly under the first 5 yrs of the ARM = $500 x 12 x 5yrs = $30,000.
b) Interest rate = actual ARM teaser rate for 5 years, 2.65%
c) Years of Mortgage = 5 (Loan is paid off at end of teaser rate)
d) All other fields left blank
Step 3) Special Expenditure: Pay off loan balance at end of 5yr teaser rate period = 246,000 – 30,000 = 216,000 onetime payment.
Modeling results using above approach are the Annual Consumption of the test duplicate profile compared to the original profile goes down 35%; whereas, the Net Worth of the test duplicate profile goes up 13%. Under the ARM my monthly mortgage payment is reduced 50% for the 5 years that the loan is outstanding. From an annual consumption point of view, this tells me to NOT refinance and hold onto my current 15 fixed conventional loan. This is the conclusion only if the above methodology is reasonably correct…What do you think? Thanks,

dan royer's picture

Does this get the taxes right? I'm also not sure if this approach is following nominal and real dollars correctly. In other words, is your math that gets you to the 216K one-time payment accounting for inflation? (entered as nominal or real?)