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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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But a word of caution about refinancing: For some borrowers, the cost of refinancing can eat away or even wipe out the savings from a lower-rate loan, said Larry Pendleton, president of Legend Mortgage in Olney.
A person who saved $50 a month by signing up for an adjustable loan would save $4,200 in seven years. However, Pendleton said, refinancing costs could easily gobble up half of that upfront.
"You've got to ask yourself: Does that make sense?" Pendleton said.
Those who plan to sell before the interest rate adjusts should keep a watchful eye on real estate market conditions, said Augie Zullo, a senior loan officer at Access National Mortgage in Reston.
If you can't sell and home prices level or drop off, you could end up owing more than the house is worth by the time the new interest rate kicks in.
"That's particularly true if you start off with not a lot of equity in the house," Zullo said. "If you don't put any money down and you only want to stay in the house for five years, you're banking on appreciation, and that's why so many people are stuck now."
So one of the first questions Zullo asks his clients is: How long are you staying? "That's the hardest question to answer," he said. "Thinking about the interest rate only is what gets you in trouble."
The biggest problem, Edelman said, is that borrowers too often choose adjustable-rate or interest-only loans simply because they cannot afford the 30-year, fixed-rate mortgage.
"That's a huge mistake," Edelman said. "That's the mortgage industry's way of telling you the house is too expensive and you should be buying a cheaper house."
