Tuesday, August 14, 2012

Is a short-term mortgage right for you?- cont.

When shorter terms work

No single solution works for everyone. A man in his late 30s, has lowered his interest rate by 1.75% by refinancing four times in less than four years. In his recent refinance, he chose a 30-year term after briefly considering a shorter mortgage. But this client is all about the cash flow. The idea of throwing too much toward the principal doesn’t make sense right now. He isn't about paying it off 30 years from now. The home, great as it is … will be something they've sold off or converted to a rental property at that point.
The client's new 3.75% rate also includes his loan fees. That cost him about a quarter of a percentage point, or $30 to $40 more a month.
Another client refinanced out of a 30-year mortgage and into a 10-year fixed term at 3% — while lowering his monthly payments. Reducing the loan term and the monthly payment is "pretty rare,". But this homeowner had some advantages: He had been paying off the loan for 12 years, and his rate dropped from 6.5% to 3%. Also, years of payments had shrunk his mortgage balance enough so he could borrow considerably less money this time.
For him, a 10-year term "was a no-brainer.". Also, the man is in his 60s, and retiring with a paid-off home is important to him. He has plenty of cash, so lowering his monthly payment through a 30-year term doesn't matter as much as it might to someone else.
A third recent client who chose a five-year mortgage for his refinance. What's more, the man wanted an interest-only, adjustable-rate mortgage, a loan that many consider risky. The rate is reset periodically, and it can rise. Also, paying only interest never gets you any closer to owning your home outright.
Interest-only mortgages were sold aggressively to lower-income borrowers by some lenders during the bubble. That led to defaults when the escalating payments grew beyond what homeowners could afford.
Before that, however, short-term interest-only loans were marketed primarily to high-income homeowners as a sophisticated financial tactic. Because these loans' interest rates are cheap, at least initially, wealthy borrowers can use the savings to earn a better return on their money elsewhere — a rental property, business investment or annuity, for example.

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