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A Tidier Way To Borrow
Fred Wixson, with his wife, Liz, and son, Charlie, refinanced five years ago from a fixed-rate to an adjustable loan to save money for improvements on their Alexandria house, to buy cars and to pay off his student loan. The loan payments have been interest only, and he plans to refinance before the rate resets.
(By Richard A. Lipski -- The Washington Post)
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"For $50 more a month, you get the certainty that your payment will never increase," McBride said. "But if you go with an adjustable rate, you're saving $50 a month over five years but bearing the risk of a much higher payment in the years that follow."
Choosing a fixed-rate loan despite its higher rate is a fine strategy for someone who plans to live in the home for a long time, meaning 10 years or more, said Ric Edelman, a financial planner in Fairfax. But anyone who does not plan to stay for that long should consider adjustable loans, which come with all sorts of features, including a choice of how long it will be before the rate changes -- one, three, five, seven and 10 years are common.
For instance, a homeowner who expects to move in five years may be better served by a loan that resets in five to seven years. That loan would essentially function as a fixed-rate loan but at a discount because of the lower initial rate.
Whatever the borrower saves by going that route should be invested wisely, Edelman said. The borrower can then sell the home as planned before the loan adjusts.
"That's how a mortgage helps you create wealth, and it's a radically different approach than our parents and grandparents had," Edelman said. "But it only works if the borrower acts prudently and doesn't squander the savings."
There's another way to lower the payments and enhance the savings: Choose a loan with an interest-only feature, Edelman said. That's what he advised Fred Wixson to do.
Wixson bought a house in Alexandria in 1999 using a 30-year, fixed-rate mortgage and refinanced to an adjustable-rate mortgage three years later.
His new loan is interest-only for the first seven years. After that, the interest rate will adjust and he must pay the new rate and also start paying down the principal.
Wixson said the difference between his original mortgage and the new loan amounts to about $600 saved each month, money he and his wife, Liz, have used mostly for home-improvement projects.
The couple put on a new roof, remodeled the kitchen and a bathroom, added central air conditioning, built a master bedroom suite, and created an outdoor kitchen and bar area.
"We've also paid off my student loans, which were obviously at a much higher rate, and we bought cars with money from the home," said Wixson, a physical therapist. "Had we financed the cars separately, it would have been at a much higher rate than the rate we're paying on our mortgage."
The Wixsons say they hope to refinance their mortgage before it adjusts.
