You may be considering the purchase of home or condominium - or - considering a refinance to pay off that now, high interest rate Home Equity Line of Credit (HELOC). As you consider your financing choices, you want interest rate protection because you know that rates are continuing to go up but your monthly cash flow (keeping your monthly payments low) is also a major concern. Yes, there is always the 30-year fixed rate - but realistically, do you expect to own this home or condominium for 30 years?
Unlike earlier generations who really did live in their homes for 30 years, statistics say that most of you will live in your current home for less than seven years and you will change your mortgage products far more often than this. The economy changes, our lives change, and our financial plans change in response. We remodel, buy a larger home, a smaller condominium or move away. Do we really need that 30-year fixed rate?
Other mortgage alternatives that protect your rate, offering lower payments for a period of years are the "interest only" mortgage products. Interest rates are "fixed" for a period of years, 3 years, 5 years, 7 years, or even 10 years. For these first "fixed rate" periods, you have the option to make "interest only" payments each month. It is a simple calculation to figure out your monthly payment. You multiple your yearly interest rate - times your mortgage balance and divide by 12. This will be your monthly payment each month during the "fixed" period of your Interest Only mortgage. The 30-year fixed rate monthly payment on a $415,000 mortgage might be $2,589 while on an Interest Only mortgage the payment might be $2,118 - quite a bit lower.
On your "Interest Only" mortgage, you can pay more on any month but unless you do, at the end of the 3, 5, 7, or 10 years - you will owe the same mortgage amount that you started with. If you feel that your home or condominium is appreciating, this might not concern you because you have made the choice to have lower monthly payments.
The major thing that you need to be aware of in order to make wise decisions - is to determine what happens at the end of the "fixed rate" period of your Interest Only Mortgage. Remember, this product is an Adjustable Rate Mortgage with a fixed rate period at the front end. At the end of the fixed term, the lender is going to want to catch up to current rates as quickly as possible. You may find your first adjustment may be as high as 5 percent and then future interest rate caps will regulate periodic adjustments as described in the note and disclosures you sign at closing.
Your best protection is to figure that you will either move or refinance before the end of the fixed period of your Interest Only mortgage. How long will you realistically live there before you want to remodel or move? If you are thinking 3 years, consider the 5-year Interest Only ARM to give yourself a little wiggle room. If you are thinking that you will live there 5 years - consider the 7-year Interest Only Mortgage. These are wonderful products when you know exactly how they work.
Carolyn Cromey is Branch Manager of PLN Mortgage Service, 33 N. Garden, Suite 120 (Downtown Clearwater) carolyn@cormey.net 727-442-6100.