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Interest Only Refinance Options

Oct 10, 2007
Are you one of the many home owners that opted for an adjustable rate mortgage over the last five years? Have you seen your interest rate and your payment increase? Florida mortgage expert Jim Kemish discusses the current market environment and a new option for an affordable refinance.

Adjustable Rate Mortgage Popularity

Over the last five years almost forty percent of all home buyers selected adjustable rate mortgages. In early 2004 signs of inflation begin to appear. These indications pressed the Federal Reserve into action. From June 2004 to June of 2006 the Federal Reserve increased the Federal Funds Rate 17 times. The impact of these increases was to push up the short-term mortgages indexes that determine the target or fully indexed rate on these adjustable rate mortgages. Borrowers that enjoyed the benefits of these low payment mortgage products are now finding themselves with considerably higher interest rates as their mortgages adjust.

Short Term Rates Up

This interest rate environment has a silver lining. The intent of the Federal Reserve's actions during this period of time was to contain inflationary forces that would have resulted in higher long-term interest rates. As of this moment, the Federal Reserve has been successful and long-term mortgage rates have remained near historic lows. The Federal Reserve has been so effective that long term rates such as thirty-year mortgages are now lower than adjustable rate mortgage offerings.

Long Term Rates Down

The anomaly of long term rates falling below short term rates is referred to by economists as an inverted yield curve. This phenomenon is currently providing the best possible refinance environment for borrowers that have recently experienced an increase in their adjustable mortgage rates. No one has been happy about watching their monthly payment increase. But imagine the alternative scenario where short and long term rates might have moved up together making it impossible for borrowers to refinance into an affordable mortgage.

Option ARM Concerns

One of the most popular mortgage programs of this period of time was the negative amortization loan. This loan type has been branded by many different names including the Option ARM. This loan allows borrowers to make a payment based on an interest rate that is often significantly below the effective, or fully indexed, rate. Borrowers selecting this low payment option find themselves owning more than they originally borrowed. Florida Mortgage brokers originated significant numbers of these mortgages as real estate values soared and buyers were eager to find ways to make their home payments affordable.

The New Fixed Rate Interest Only Mortgage

A new product has emerged that has become a terrifically popular option for borrowers wishing to refinance and to keep their home loan payments at a minimum. This program is the new thirty year fixed rate interest only mortgage. Interest only mortgages allow a borrower to pay only the interest due on a loan thereby minimizing their payments. Until very recently these interest only programs were only available on adjustable rate mortgages. That meant that in a short period of time, ranging from two to five years, the interest only feature would expire and the rate would adjust. This combination of events has the potential of more than doubling a borrower's monthly payment.

A Caveat

This new breed of fixed rate interest only mortgage combines the security of a fixed rate mortgage with an attractive low interest only payment. Like previous versions of interest only programs the interest only period is for a finite period of time. These new programs have improved on this aspect of the mortgage as well by extending the interest only period to ten years. There is one caveat to be aware of. Although the rate will remain fixed when the loan transitions from an interest only loan to a fully amortized loan at the end of ten years, the amortization period is limited to the remaining twenty years. The change from an interest only payment to a twenty year amortized payment will be noticeable and should be planned for.

Market Factors

Another factor that is driving this move to refinance is the weakened real estate market. As a Florida mortgage broker I have seen a significant increase in the number of borrowers that have decided against selling their homes, opting instead to refinance. Refinancing into an interest only program for many borrowers is the most attractive option. Many of these same people are refinancing out of their negative amortization loans wishing to keep their payment at a minimum and at the same time put an end to the reverse amortization effect of their current mortgages. The weakening real estate market has further underlined the importance of maintaining equity. There is little that we can do about market forces, but we do have control over the mortgage options that we choose.

Copyright 2007 James W. Kemish. All Content. All Rights Reserved.
About the Author
Jim Kemish is the president and founder of Power Mortgage, a Florida mortgage company based in Delray Beach, Florida. Jim is also the President of Sky Blue Credit, a national credit repair business.
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