Your Mortgage Loan is Going to Reset
Today consumers are concerned about their mortgages and what the future holds, more specifically, what to do with resetting rates and when. Low interest rates in the mid 4’s to low 5’s, excellent rates by historical standards, have people scrambling to refinance loans with adjustable terms to fixed rate & term product. Is that really necessary?
John and Georgia owe $376,000 on their Bay Area home. This loan, like many issued in the 2000 - 2004 mortgage and real estate boom period, was called a hybrid, containing both fixed rate and adjustable portions. They have an interest only payment option lasting until 2013, and the monthly payment is $1,763.
Current Loan
|
Item |
Value |
|
Fixed Portion |
|
|
Balance |
$376,000 |
|
Loan Type |
Hybrid (fixed then adjustable |
|
Payment type |
Interest only |
|
Interest rate |
5.625% |
|
Payment amount |
$1,763. |
|
Reset date |
8/1/09 |
The fixed rate portion is about to reset to a 1 year adjustable in August. The terms of this change are index + margin is their new rate. The index is the 1 year Treasury Security or CMT, the lifetime margin for the loan is 2.75%.
The clients, worried about John’s work situation are frantically looking for what to do next sampling the marketplace for appealing options. The problem is everyone they speak to is on the sell for a solution in the form of a new mortgage that will be the:
- Lowest rate
- Lowest cost
- Best loan available
- Lowest monthly payment
- Perfect solution to solve their problems
Call any lender or mortgage broker and you’ll see, this list will go on and on with all the emotional appeal crafted to get you a better loan.
Suppose John & Georgia settle on the new mortgage in the chart below. They pay .25 points (1/4 of 1% of their new loan amount), include all costs and expenses totaling about $3,900. into their new loan so they don’t have to write a check at closing, and they get a new 30 year fixed rate loan. Both the loan balance and monthly payment will be higher.
|
Item |
Value |
|
New Fixed Loan |
|
|
Balance |
$379,900 |
|
Loan Type |
30 year fixed |
|
Payment type |
Principal and interest |
|
Interest rate |
4.75% |
|
Payment amount |
$1,982 |
|
Increases |
Loan $3,900 – Payment $218.74 |
- They have increased their mortgage and reduced their home equity by $3,900.
- They have increased their monthly payments by $218.75.
- Was this the best option for them?
When I asked this question they said well, we’re not sure about John’s job and we feel better knowing our loan isn’t going to change to something we don’t understand, and besides things are still getting worse aren’t they?
In my next post on Monday I’ll show you the review we did and what their options were.
Study the data on both the old and new loan and test your knowledge and conclusion. Then on Monday find out if you would have made the right choice for yourself.
We will also have a special offer lasting 48 hours where you could win a free tri-merge credit report complete with a complimentary consultation and analysis.
See you at Do You Really Need to Refinance - Part 2
