ARMy
“It doesn’t work to leap a twenty-foot chasm in two ten-foot jumps.” – American proverb
Sorry to be on the Suze kick this week, but there is good advice in her Ten Tips for a Prosperous 2006 – and Beyond. You can read all ten tips here but I wanted to focus on Tip #6: Get UnARMed.
“In some parts of the country, more than half the new mortgages taken out over the past few years are interest-only or adjustable rate mortgages (ARMs). These were attractive at the time, but mortgage rates are already nudging up. As I write this, they’re above 6 percent. That means if you have a 4 percent adjustable rate mortgage, you better get ready for a big hike. And no one expects rates to go down anytime soon, so don’t feel smug even if your adjustment isn’t until 2007.”
“If you have an ARM or interest-only mortgage and plan to stay in your home for a while, make it your primary financial priority to convert to a fixed-rate mortgage. If you plan to move in the near future, consider a hybrid mortgage with a fixed rate that mirrors how long you’ll stay. For example, if you plan on moving in five years, consider a 5/1 hybrid, where the initial rate will not change for the first five years.”
On my rental property in Las Vegas, I’m locked into a 30-year fixed with a good rate but I also keep a HELOC available so I have extra cash when it’s needed. I used it for the fixer in Palm Springs and in a few short months have seen my payment go from $120 to $165. That’s a big jump and it’s on a relatively small amount - $20,000. I will pay it off in the next few months but it was an eye-opener to what many homeowners recently have experience by pulling equity out of their homes and now see their HELOC payments on the rise.
I have heard of people pulling out $50k to $100k to pay off credit cards or buy more liabilities. As interest rates rise, these payments will continue to creep up. I have written in the past about using the home as an ATM. My belief is you can use the ATM when you’re short on cash (the purpose being to buy more assets), but you still need to make regular deposits to the bank. If not, the cash runs out and you’ll wind up being leveraged to the hilt.
Jack Guttentag offers a good explanation of the pending risk with his Bankrate.com article entitled, Interest-Only Mortgage Deja Vu. “Selling quickly for capital gain, and refinancing to “put equity to work,” reflects a new mantra: You grow equity through property appreciation, not by paying down your loan balance. The mantra ignores the fact that mortgage amortization is in the homeowner’s control while appreciation is not.”
This is a good point and I agree with the bubble heads. The market will correct itself and appreciation will be a thing of the past… at least for a cycle. So make sure that you only buy rental properties that cash flow (increasingly difficult in most markets) and that your primary residence takes advantage of a mortgage product that is less risky.
Sorry to be on the Suze kick this week, but there is good advice in her Ten Tips for a Prosperous 2006 – and Beyond. You can read all ten tips here but I wanted to focus on Tip #6: Get UnARMed.
“In some parts of the country, more than half the new mortgages taken out over the past few years are interest-only or adjustable rate mortgages (ARMs). These were attractive at the time, but mortgage rates are already nudging up. As I write this, they’re above 6 percent. That means if you have a 4 percent adjustable rate mortgage, you better get ready for a big hike. And no one expects rates to go down anytime soon, so don’t feel smug even if your adjustment isn’t until 2007.”
“If you have an ARM or interest-only mortgage and plan to stay in your home for a while, make it your primary financial priority to convert to a fixed-rate mortgage. If you plan to move in the near future, consider a hybrid mortgage with a fixed rate that mirrors how long you’ll stay. For example, if you plan on moving in five years, consider a 5/1 hybrid, where the initial rate will not change for the first five years.”
On my rental property in Las Vegas, I’m locked into a 30-year fixed with a good rate but I also keep a HELOC available so I have extra cash when it’s needed. I used it for the fixer in Palm Springs and in a few short months have seen my payment go from $120 to $165. That’s a big jump and it’s on a relatively small amount - $20,000. I will pay it off in the next few months but it was an eye-opener to what many homeowners recently have experience by pulling equity out of their homes and now see their HELOC payments on the rise.
I have heard of people pulling out $50k to $100k to pay off credit cards or buy more liabilities. As interest rates rise, these payments will continue to creep up. I have written in the past about using the home as an ATM. My belief is you can use the ATM when you’re short on cash (the purpose being to buy more assets), but you still need to make regular deposits to the bank. If not, the cash runs out and you’ll wind up being leveraged to the hilt.
Jack Guttentag offers a good explanation of the pending risk with his Bankrate.com article entitled, Interest-Only Mortgage Deja Vu. “Selling quickly for capital gain, and refinancing to “put equity to work,” reflects a new mantra: You grow equity through property appreciation, not by paying down your loan balance. The mantra ignores the fact that mortgage amortization is in the homeowner’s control while appreciation is not.”
This is a good point and I agree with the bubble heads. The market will correct itself and appreciation will be a thing of the past… at least for a cycle. So make sure that you only buy rental properties that cash flow (increasingly difficult in most markets) and that your primary residence takes advantage of a mortgage product that is less risky.
posted by Nina Smith at 6:19 AM
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