Monday, October 10, 2005

Refi Refi Refi

In the Los Angeles Times’ Business Section today, there is an item about the apparent mortgage refinance boom. Essentially, we’re talking about Adjustable Rate Loans and Interest Only Loans that have created a potentially dangerous situation for borrowers who may see their payments skyrocket over the coming months or years.

As interest rates increase so too will monthly payments. On interest only loans, the payment will increase to include both principal & interest in the monthly payment once the fixed term of the interest only payment ends. This can be anywhere between 3-5 years.

There is somewhat of a panic among these borrowers who chose these creative finance options, and, perhaps rightfully so. If the loan is getting near the end of its term, where the interest rate may increase if a variable rate loan, or interest only payment now includes principal, in an interest only loan, then they should definitely refinance out of those loans.

For the rest of us, we need to change the way we think about these Creative Finance Options. Sometimes we consider these things a way to get a cheap mortgage. I like to consider them, a Finance Tool. A tool that enables us to leverage our investment. Basically, lower investment, lower monthly payment, higher return.

These loans also, are probably the only way some buyers will ever be able to afford a home. But there are some considerations to take into account with these loans.

First off, you should condition yourself into paying more than the minimum payment all the time, on time. If you don’t expect your income to increase drastically within the next couple of years or if you don’t plan on moving anytime soon, perhaps these loans aren’t for you. It is necessary to refinance out of or sell the house in order to avoid increases in payments which you might not be able to afford. Also with these types of financing, if the property value drops, you might end up owing more on the house than its worth. So, to avoid a disaster should a drop in value happen, it is highly advisable to get equity built up to help cushion a slight drop in value.

For more information regarding the creative finance options available to home buyers, please e-mail

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