Are you one of the many homeowners who chose a mortgage with a variable rate in the last five years? Have your interest rate and payment both gone up? Jim Kemish, a Florida mortgage expert, talks about the current state of the market and a new option for a low-cost refinance.
Adjustable Rate Mortgages Are Common
In the last five years, almost 40% of all people who bought a home chose an adjustable rate mortgage. At the beginning of 2004, there are signs of inflation. The Federal Reserve had to act because of these signs. The Federal Reserve raised the Federal Funds Rate 17 times between June 2004 and June 2006. Because of these increases, the short-term mortgage indexes that determine the target or fully indexed rate on these adjustable rate mortgages went up. Borrowers who took advantage of these mortgages with low payments are now getting much higher interest rates as their mortgages adjust.
Short-Term Rates Go Up
There is a bright side to this interest rate situation. During this time, the Federal Reserve took steps to stop inflationary forces that would have caused long-term interest rates to go up. As of right now, the Federal Reserve has done a good job, and long-term mortgage rates have stayed close to their lowest levels ever. The Federal Reserve has done such a good job that rates for thirty-year mortgages are now lower than rates for mortgages that change over time.
Long-Term Rates Go Down
Economists call it a "inverted yield curve" when rates for the long term go down below rates for the short term. This is the best time to refinance for people whose adjustable mortgage rates have recently gone up. No one has been glad to see their monthly payment go up. But think about what would happen if both short-term and long-term rates went up at the same time, making it impossible for people to refinance into a mortgage they could afford.
Concerns About Option ARM
The negative amortisation loan was one of the most popular ways to get a mortgage during this time. This kind of loan has been called a lot of different things, like the Option ARM. Borrowers can make payments on this loan based on an interest rate that is usually much lower than the effective, or fully indexed, rate. When people choose this low-payment option, they end up owning more than they borrowed. As home prices went up and buyers wanted to find ways to make their mortgage payments more affordable, a lot of these mortgages were started in Florida by mortgage brokers.
The new interest-only loan with a fixed rate
A new product has become a very popular choice for people who want to refinance their home loans and keep their payments as low as possible. This is the new interest-only mortgage with a fixed rate for 30 years. With an interest-only mortgage, the borrower only has to pay the interest on the loan. This keeps their payments as low as possible. Until not too long ago, these interest-only programmes were only available for mortgages with a variable interest rate. This meant that the interest-only feature would end in a short time, between two and five years, and the rate would change. This set of events could cause a borrower's monthly payment to go up by more than double.
A Warning
This new type of fixed-rate, interest-only mortgage gives you the security of a fixed-rate loan and the appeal of a low payment for interest only. Like other interest-only programmes, the interest-only period lasts for a certain amount of time. This part of the mortgage has also been made better by these new programmes, which have made the interest-only period last for ten years instead of five. There is one thing to keep in mind. When the loan goes from an interest-only loan to a fully amortised loan after ten years, the rate will stay the same, but the loan will only be paid off over the next twenty years. The change from an interest-only payment to an amortised payment over twenty years will be noticeable, and you should plan for it.
Market Conditions
The weak real estate market is another reason why this move to refinance is happening. As a mortgage broker in Florida, I've seen a big rise in the number of people who don't want to sell their homes but instead want to refinance. For many borrowers, the best choice is to refinance into an interest-only plan. Many of these same people are getting out of their negative amortisation loans by refinancing. They want to keep their payments as low as possible and stop the effect of reverse amortisation on their current mortgages. The fact that the real estate market is getting worse has made it even more important to keep equity. We can't do much about how the market works, but we can choose which mortgage options we want.
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