Monday, March 13, 2006

Is Now the Time to Refinance?

I've been checking out current interest rates for real estate loans. I was amazed at how small the spread was between a fixed and an adjustable rate loan. Jumbo loans (over $417,000) are 6.250% for a 30 year fixed rate and 6.125% for a 10 yr/adjustable interest only and 5.750% for a 5 year/adjustable interest only. A good adjustable should be at least 2% under the fixed rate to give you some space if rates begin to move upward... and rates are moving up... not down.
I truly can't see much advantage to these interest only loans when they adjust after the first year. You could be in real trouble if you aren't able to pay the full monthly payment after one year. This is especially true if you bought with less then 10% down. It is possible for these loans to have negative amortization which means you could owe more then the original amount of the loan if you continue to pay the minimal payment and not the "true" payment due. You could wind up owing more then you can sell the property for when you consider your closing costs.
The market is stabilizing and while prices are still going up they are at a much slower and smaller amount then in the previous years. If you have one of these loans and it is about to adjust you might want to consult with a lender and talk about changing to a fixed rate.

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