Investment & Financial Articles
Title: Is Refinancing a Good Idea Right Now?
Author: Barrett Niehus
Article:
Is Refinancing a Good Idea Right Now?
By Barrett Niehus http://www.freetrainer.com
Rates on mortgages are lower than they have been in forty years.
This provides a huge opportunity for new and existing home
owners, but also carries risks that can have a substantial
impact your ability to pay in the future. Mortgage lenders are
inundated with work, and it was recently reported on national
news that "if you can breath, you can get a mortgage." This
phrase should at the very least frighten the average mortgage
customer. It indicates that not only are the mortgage companies
finding new ways to make money off of their huge list of
clients, but they are also circumventing the risk analysis that
avoids putting high risk customers into immediate credit
trouble.
The opportunity is immense. For many home owners, monthly
mortgage payments can be reduced by ten to fifteen percent
through a refinance. For new home owners, they can afford to pay
ten to fifteen percent more because of resulting low monthly
payments. The benefits are substantial and if addressed
properly, the risks can be avoided.
The risk of course is choosing a form of financing with inherent
uncertainties and putting your long term financial situation at
risk. One of the most popular mortgage products available today
are variable (floating) rate mortgages. The mortgage rate varies
with the current Treasury rate until it is locked in at a set
amount above the future treasury rate three to five years after
the date of origination. Many mortgage customers are fond of
this type of funding because it allows them to enjoy a very low
rate for the next three or five years. Unfortunately, the risk
involved with this type of loan is huge, and can have
substantial impact on the customer's ability to pay.
Given that rates are at a forty year low, it is very probable
that interest rates will climb substantially within the next
three years. Although most of these variable rate mortgages have
interest rate caps where the lock in rate will not exceed twelve
percent, the impact of a rate increase during a lock-in period
can be substantial. To provide an example, suppose you have a
$200,000 variable rate mortgage with a 5.5% interest rate. When
you first originate the loan, your monthly payment will be
$1,135. If interest rates increase to 12% by the time of your
lock in period, your payments will increase to $2055 per month;
where they will remain for the life of the mortgage. For many
home owners this type of increase will quickly lead to default,
eviction, and bankruptcy.
Keep in mind that mortgage lenders are sales people, and
mortgage brokers are essentially selling you a product. They
make money when they sell you a mortgage. With the current
emphasis on low finance rates, they are inundated with business,
and are more focused with getting the loan closed than with
evaluating your future ability to pay. As sales people, they
have been given a number of products to sell, and because of the
current frenzy, have been given substantial leeway from the
banks. Therefore, they can forgo many of the risk analyses that
were necessary during leaner banking times and sell whatever
mortgage product is available.
With mortgage brokers trying to fund all of the business that
they are given, and with mortgage products that carry high
uncertainties, the risk associated with purchasing or
refinancing is higher than ever. If refinancing or funding a new
mortgage is the best financial decision for your specific
situation, be aware of the risks, quantify the benefits, and
realize that your mortgage lender has a vested interest in
closing the deal.
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About the author:
Barrett Niehus is the Managing Director or IP Ware Real Estate
Investment Analysis Software, http://www.freetrainer.com
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