| Are you one of the many home owners that opted | | | | of these mortgages as real estate values soared and |
| for an adjustable rate mortgage over the last five | | | | buyers were eager to find ways to make their home |
| years? Have you seen your interest rate and your | | | | payments affordable. |
| payment increase? Florida mortgage expert Jim | | | | The New Fixed Rate Interest Only Mortgage |
| Kemish discusses the current market environment and | | | | A new product has emerged that has become a |
| a new option for an affordable refinance. | | | | terrifically popular option for borrowers wishing to |
| Adjustable Rate Mortgage Popularity | | | | refinance and to keep their home loan payments at a |
| Over the last five years almost forty percent of all | | | | minimum. This program is the new thirty year fixed |
| home buyers selected adjustable rate mortgages. In | | | | rate interest only mortgage. Interest only mortgages |
| early 2004 signs of inflation begin to appear. These | | | | allow a borrower to pay only the interest due on a |
| indications pressed the Federal Reserve into action. | | | | loan thereby minimizing their payments. Until very |
| From June 2004 to June of 2006 the Federal Reserve | | | | recently these interest only programs were only |
| increased the Federal Funds Rate 17 times. The | | | | available on adjustable rate mortgages. That meant |
| impact of these increases was to push up the | | | | that in a short period of time, ranging from two to five |
| short-term mortgages indexes that determine the | | | | years, the interest only feature would expire and the |
| target or fully indexed rate on these adjustable rate | | | | rate would adjust. This combination of events has the |
| mortgages. Borrowers that enjoyed the benefits of | | | | potential of more than doubling a borrower's monthly |
| these low payment mortgage products are now | | | | payment. |
| finding themselves with considerably higher interest | | | | A Caveat |
| rates as their mortgages adjust. | | | | This new breed of fixed rate interest only mortgage |
| Short Term Rates Up | | | | combines the security of a fixed rate mortgage with |
| This interest rate environment has a silver lining. The | | | | an attractive low interest only payment. Like previous |
| intent of the Federal Reserve's actions during this | | | | versions of interest only programs the interest only |
| period of time was to contain inflationary forces that | | | | period is for a finite period of time. These new |
| would have resulted in higher long-term interest rates. | | | | programs have improved on this aspect of the |
| As of this moment, the Federal Reserve has been | | | | mortgage as well by extending the interest only period |
| successful and long-term mortgage rates have | | | | to ten years. There is one caveat to be aware of. |
| remained near historic lows. The Federal Reserve has | | | | Although the rate will remain fixed when the loan |
| been so effective that long term rates such as | | | | transitions from an interest only loan to a fully |
| thirty-year mortgages are now lower than adjustable | | | | amortized loan at the end of ten years, the |
| rate mortgage offerings. | | | | amortization period is limited to the remaining twenty |
| Long Term Rates Down | | | | years. The change from an interest only payment to a |
| The anomaly of long term rates falling below short | | | | twenty year amortized payment will be noticeable and |
| term rates is referred to by economists as an inverted | | | | should be planned for. |
| yield curve. This phenomenon is currently providing the | | | | Market Factors |
| best possible refinance environment for borrowers | | | | Another factor that is driving this move to refinance is |
| that have recently experienced an increase in their | | | | the weakened real estate market. As a Florida |
| adjustable mortgage rates. No one has been happy | | | | mortgage broker I have seen a significant increase in |
| about watching their monthly payment increase. But | | | | the number of borrowers that have decided against |
| imagine the alternative scenario where short and long | | | | selling their homes, opting instead to refinance. |
| term rates might have moved up together making it | | | | Refinancing into an interest only program for many |
| impossible for borrowers to refinance into an | | | | borrowers is the most attractive option. Many of these |
| affordable mortgage. | | | | same people are refinancing out of their negative |
| Option ARM Concerns | | | | amortization loans wishing to keep their payment at a |
| One of the most popular mortgage programs of this | | | | minimum and at the same time put an end to the |
| period of time was the negative amortization loan. This | | | | reverse amortization effect of their current mortgages. |
| loan type has been branded by many different names | | | | The weakening real estate market has further |
| including the Option ARM. This loan allows borrowers | | | | underlined the importance of maintaining equity. There |
| to make a payment based on an interest rate that is | | | | is little that we can do about market forces, but we do |
| often significantly below the effective, or fully indexed, | | | | have control over the mortgage options that we |
| rate. Borrowers selecting this low payment option find | | | | choose. |
| themselves owning more than they originally borrowed. | | | | Copyright © 2007 James W. Kemish. All Content. |
| Florida Mortgage brokers originated significant numbers | | | | All Rights Reserved. |