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Delaying
the Inevitable, Re-Refinancing |
|
Many Americans have become accustomed
to their monthly payments of bills and mortgages.
As adjustable-rate mortgages continue to climb,
they have come up with a way to keep their monthly
payments on track, by re-refinancing with a new
adjustable-rate
mortgage.
The New York Times columnists,
Vikas Bajaj and Ron Nixon, collaborated to explain
the pros and cons of re-refinancing, in their July
23, 2006 article, “Re-Refinancing, and Putting
Off Mortgage Pain.”
Even though re-refinancing
will lower your monthly payments, mortgage
experts urge you to reconsider this action unless
it is absolutely necessary, since payments will
likely rise even higher in the future.
“Some people would say I am a little crazy,’
acknowledged R. Lance Perry, 42, of Danville, Calif.,
one of the new breed of people refinancing their
mortgages.” Perry re-refinanced because his
monthly payments drastically increased and he felt
like this was his best option.
“By
the time the rate goes up, he figures, his income
will have increased enough to cover the higher payments,
he will have refinanced again or he will have moved.”
Perry is one of millions of Americans who have turned
to adjustable-rate mortgages (A.R.M.’s) in
the past few years since home prices have sky-rocketed.
“Now, the first big wave of the mortgage
boom is cresting as more than $400 billion worth
of adjustable-rate mortgages, or about 5 percent
of all outstanding mortgage debt, will readjust
this year for the first time, according to Loan
Performance, a research firm. Next year, another
$1 trillion in loans will readjust.”
As a result, “a typical borrower with a $200,000
A.R.M. could see his monthly payments increase nearly
25 percent when the A.R.M. adjusts from 4.5 percent
to 6.5 percent. In total dollars, that is an increase
from $1,013 a month to $1,254.”
So, instead of paying more now, borrowers are refinancing
into their second or third adjustable-rate mortgage.
This will delay the inevitability of having to confront
higher monthly payments again, for about three years
or longer. The current number of borrowers refinancing
for a second or third time, or “re-refinancing,”
is relatively low, but experts expect the amount
of these borrowers will soar by next year.
“They get another two- or three-year
hybrid with a low introductory rate to keep payments
down,’ said Frank E. Nothaft, a vice president
and chief economist at Freddie Mac, the mortgage
buyer. ‘They’re trying to put it off
forever, which is O.K. as long as interest rates
are low. But when they start to spike, then it’s
going to be more problematic.’”
This re-refinancing breathes light into the immediate
future for the economy because it suggests that
less people will have to foreclose their homes and
will not have to cut back on consumer spending.
But the re-refinancing also suggests that house
prices on the East and West coasts will continue
to rise. “If the value of the home falls closer
to the amount of the loan, that could curb the ability
to refinance, and may prompt the homeowner to either
invest more in the home or to sell it.”
“Still, borrowers like Mr. Perry say
the loans make sense because in a few years they
plan to move to another home, earn more or refinance
again, often using the same assumptions they made
when they took out their earlier loans.” |
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