Teasing Me, Is Not Pleasing Me

By: Dale Rogers
Submitted: 2007-01-17 16:16:08
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Teaser rates on variable mortgage products looked great at the beginning. Borrowers are starting to come out from the affect of the ether and waking up to a rate that is in some cases DOUBLE from where they started. A lender would offer ?% to 1.0% below Prime rate (currently just increased to 8.25%) for say the first six months then go up to say just Prime. There were multiple combinations offered to attract the borrowing public.

Subliminally, just barely below the human ear range, the song plays, “Those were the days my friend, I thought they would never end…” Now, with the current changes and movement of rates, the song “Wake Up Little Suzie…” is blasting for all to hear. No subtly here.

What to do. Many fixed rate mortgages are less than the Prime rate. What was once a very cheap and attractive borrowing mechanism has now burdened the borrowing public with rising rates. Borrowers have a down turn look where banks are smiling from ear to ear with the status of the Home Equity Line Of Credit (HELOC) tied to prime. Those borrowers who chose to pay a little more payment at the time and locked in a fixed rate are doing very well. I suspect those little voices from the past when parents and the like would share with their children, “…stay away from adjustable rate mortgages, they can bite you down the road.” These words of advice have come full circle from the low rates of the past.

If you are going to stay in your home for a long period of time, say ten years or more, and then a long-term finance plan would be in order. If you are not going to be in your home very long, say 2 to 3 years or less, then it will tougher to justify closing costs to lock in a fixed rate. Let’s focus just for the moment on folks who are going to be staying in their homes for a long time. For example: If you have a $200,000 first at 6.25% or better with an original 30 year term with payments of $1,231.43/month in principal and interest. In addition, you now have a 20 year $70,000 Home Equity Line of Credit at Prime or 8.25% or a current payment of $596.45/month with the immediate prospect of this going up some more in the short term. It would then make some sense to look at some alternatives.

Simply, depending on credit score and loan to value of the property, a borrower could just go and convert the HELOC to a fixed rate and stop the roller coaster ride. The rate will be a little higher but the uncertainty will be gone. The current blended rate per this example is: $200,000 x 6.25% = $12,500 for the first and $70,000 x 8.25% = $5,775 for total annual interest of $12,500 + $5,775 = $18,275 divided by the total outstanding debt of $200,000 + $70,000 = $270,000 is $18,275/$270,000 = 6.7685% as a simple interest blended rate at this moment.

Thus a long-term rate of 6.7685% or less could be argued to give some long-term relief. However, if the borrower had been in the first mortgage for five years then in order to not back track a term of say 25 years could be sought. You would extend the term on the HELOC and that would be regressing a bit. Today, a 6.625% rate could be achieved with the closing cost spread over the loan for the longer term without worrying about an escalating second mortgage. If your budget could stand it, a fifteen-year loan then would save a ton of interest with a current 6.25% rate at this writing. It would be more of a forced savings plan with the shorter term.

It’s all in the details. If you have a similar situation and can gather all the information then set about to determine what alternatives might be out there for you and make a decision based on the facts and how best that will serve your long term family goals. At the time some of these Teaser Rates looked great. Now, over night it seems, have taken on a different persona. Now, they are not too pretty. The banks think they are beautiful showing once again that beauty lies in the eye of the beholder. Check your options. Please your family, not the banks.

About the Author:

Dale Rogers is a thirty-year mortgage veteran and frequent contributor to the Broken Credit Blog The BCB is a free website created to assist the general public with information about credit repair and responsible mortgage lending.

http://www.BrokenCredit.com