Alan Greenspan has left office, so with the new man in charge (Ben Bernanke), we can only guess what the future might bring us in terms of Fed policy. If only I had a crystal ball that would tell me what the fed and markets will do regarding interest rates, I might be able to retire with Bill Gates money. However, since I don’t I can only take the advice and knowledge of the experts who are paid the big bucks to study this data and make recommendations to you my client.
When we borrow money, my goal as a loan professional is to ensure you receive the lowest cost for your borrowed funds, so the knowledge I read and learn about daily assists me in helping you make decisions about your mortgage along with me making decisions about my mortgage. During the process of home ownership, I will continuously weave in and out of various loan products through refinancing to ensure that I have the lowest cost for my borrowed funds.
We know the Fed just raised short term interest rates 1/4 point on January 31 and we know in all likely hood the Fed is going to raise rates again another 1/4 point in the months ahead. If you have a home equity line of credit, you are feeling the pain of this in a major way because every time the Fed raises rates, you see it reflected on your statement for your Home Equity Line in the form of a higher payment because the “Prime Rate” has gone up which is what your Home Equity Line is based on.
I’m closing on a house at the end of March. I prefer 100% interest only financing on my home because I believe in managing my equity separate for wealth creation purposes, however the Fed is making me think twice about how long do I stay at 100% or drop my equity position down to 90% LTV. For now, I have decided to stay the course because of tax benefits from interest deductions and the offset of my tax free investments.
I was setup to close on the loan with a Interest Only Home Equity Line and switched to a Fixed Second now with a principal and interest payment. Currently my payment was going to be $42 more per month with the Fixed Second, but now that the Fed raised rates I had enough foresight to change to the fixed and lock my loan before that happened. Had I not locked my loan, I would have a higher payment on the Home Equity Line than I now have on the Fixed Second with a P&I payment.
As you can see, this simple little step will give me 1/2% lower interest rate on my Second saving me well over $1,000 in the next couple of years in payments not to mention a portion going to principal which I will separate out in 5 years. Should the markets change and Prime goes down, then I will refinance my 2nd (at no cost to you or me) to ensure I always have the lowest cost of my borrowed funds.
A true mortgage professional is going to help you manage your mortgage so that you have always have the lowest cost for your mortgage. The differnece will determine how much wealth you create by paying less for your borrowed funds.
Douglas Boncosky is a Licensed Mortgage Planner with Smart Mortgage Access in Schaumburg, IL. Doug has written a number of articles about mortgage related financing including his popular book titled "First Time Home Buyers Guide to a Stress Free Home Buying Process" Doug also writes a series of business improvement articles to help his marketing partners grow their business. Doug can be reached at http://www.dougboncosky.com
