Refinancing Your Interest Only Loans

GIMME A TAX BREAK

Refinancing Your Interest-Only Loan

It appears that the hot San Diego real estate market is cooling down. That is not all bad—unless you are trying to sell your home for top dollar in a two or three week window of time.

The stats for July of 2005 versus July of 2004 indicated that the average dwelling increased 5.4% in a year. However, the number of units sold in July of 2005 was down from July of 2004, which means that there are more homes and condos on the market and that they are on the market longer. That tells me that the trend is shifting to the buyer from the seller and the possibility exists that home prices MIGHT drop a little over the next year or two. That is more likely to occur if the interest rates continue to increase. If the short-term Treasuries and bank CDs continue moving up, the mortgage rates are going to move up with them. Therefore, if you have a good credit rating, I strongly recommend that you take a long, hard look at your budget and determine if you can possibly refinance at this time if you are in an interest-only type of loan.

Approximately 50% of the recent home buyers in San Diego are spending 50% of their monthly income for mortgage payments. That is twice as many as in the rest of the country. Also, I learned that 40% of all of the mortgages issued in California in the past 12 months were the interest-only type of loan. Interest-only loans, which take an abnormally high portion of the buyer’s take-home wages, combined with a market cool down, can become a very dangerous situation. That means that many of the loans, especially those for a relatively short term—like five years, could mature when interest rates are much higher and the value of the home has not increased substantially in value.

To avoid this dangerous situation, I recommend that if you have an interest-only loan, take a deep look inside yourself for a way to refinance with a conventional type loan that will fix the interest rate for a longer term—like 30 years, and start paying some modest amount on the principal of the loan.

10/2/2006