Post-Katrina Mortgage Calculations
Tracy Byrnes
09/12/05 - 07:11 AM EDT
It's very difficult to talk about buying a home these days when so many people in the Gulf Coast are without them.
But such is the dichotomy of life.
And while no one wants to capitalize on the pain of others, there may be a few buying opportunities over the next few months, especially in the mortgage world.
That's because there's speculation that Alan Greenspan and his cronies may pause from raising short-term interest rates when they meet on Sept. 20. Any halt (temporary or not) would buck the trend since the
Federal Reserve has raised rates by a quarter of a percentage point 10 consecutive times in the last
14 months. But with the Katrina disaster and the high price of oil and gas, the Fed may actually hold back for a bit and allow the economy to recuperate.
To their credit, the central bankers have shown restraint after past major disasters. The Fed cut interest rates in between scheduled meetings after the Sept. 11, 2001 terrorist attacks, as well as when Hurricane Andrew smacked Florida back in 1992. So it's not unlikely that they'll
at least hold rates steady at this point.
Of course, pausing on a rate hike now could just mean more aggressive increases later. So if you're in the market for a new mortgage or are considering refinancing an existing one, it actually may be prudent to take advantage of the current situation.
No Sale Here
Remember, just because something appears to be on sale doesn't mean you should buy it. So don't let the media's coverage of what Greenspan will or will not do pressure you into locking into a mortgage you'll ultimately regret having.
It's just like the fabulous Manolo Blahnik shoes I bought the other day. Regularly $650, I got them for a mere $200. I walked out of there thinking that I got a steal -- until I got home and realized my kids' tuition was due and I couldn't afford those $200 shoes, regardless of the deal I
thought I got.
So think through your mortgage decision because it's easy to get caught up in the game. Regardless of the low-rate loans out there, you're the one who has to make the monthly mortgage payments. Too many of us have pushed ourselves into more expensive homes because mortgage rates
have been so historically low.
As an example, let's presume you've decided the maximum mortgage payment you can afford each month is $2,200 on a 30-year fixed loan. If rates were up near 8%, which they were not too long
ago, with 20% down, you'd be able to borrow $300,000. So you'd be looking at a $375,000 home.
With 30-year fixed rates currently hovering around 6% you can now borrow $368,000 and keep
your monthly payment at $2,200. Again, with 20% down, you're now looking at a $460,000 house.
Things get even more tempting when you start looking at alternative products like adjustable-rate mortgages (ARMs), a.k.a. a loan that has a fixed rate for only a few years but adjusts thereafter, or interest-only loans. These products allow you to push the envelope even
further.
Remember, your mortgage payment consists of two pieces: principal and interest. In the
beginning of the loan, a big chunk of your payment goes to interest. By paying the principal
portion, you're paying down your loan in the hope of owing your home outright someday.
But if you take out an interest-only loan, you won't have to pay the principal portion of your
loan -- only the interest piece is due each month. So while your monthly payment will be cheaper,
you won't be building equity in your home.
Nevertheless, you could borrow more money with an interest-only loan and still keep your
payment manageable. So with a 6% interest-only loan, you could borrow a whopping $440,000 and
still keep your payment at $2,200. If you could scrape up the 20% down payment, you're now looking
at a
$550,000 house.
Who are you, Donald Trump?
You can see how easy it is for people to get in trouble. And while it may be the perfect time
to set your family up for life, look at the whole picture. Take it from someone who did it.
Granted, you'll own your big dream house, but don't forget that everything is bigger now. It's a
bigger house to heat this winter, a key consideration given the current exorbitant oil and natural
gas prices. It's a bigger lawn to mow, bigger rooms to decorate, and a bigger space to clean. All
your costs will increase exponentially, not just your home's purchase value.
Many people moved into big homes thinking they'd just give it a shot. If it doesn't work out,
they'll just sell the house, take their profit and run. But what if other people on your block are
thinking the same thing? The housing market is showing some
signs of
a slowdown, with last week's disappointing earnings and guidance from
Hovnanian the latest.
So how are you going to sell your home? Between Katrina, rocketing oil prices and the looming
risk of inflation, the economy may have some bumpy roads ahead which will clearly affect the
housing market. While
there may be a slew of people willing to buy that $500,000 house today, six months from now you
may actually have to lower your price to even get a bite.
"People who overextend themselves are going to get hosed. It's very difficult to win and very
easy to lose," warns Keith Gumbinger, vice president of HSH Associates of Pompton Plains, N.J.,
which tracks a variety of loan products.
Approach the Sale With Smarts
Sit down and run the numbers. And not just on your mortgage payment. Go through your potential
monthly bills too. And if it still seems plausible, then go for it because the rates are cheap now
and seemingly have nowhere to go but up.
If you're already in an ARM or other any other variable mortgage product, consider refinancing
into a fixed-rate loan. The rates between the short-term and long-term products are so slight
these days that you may be able to switch into a fixed-rate mortgage for the same price, says
Gumbinger.
So don't let all the hype force you into a bad decision. Remember, just because something is
on sale doesn't mean you should buy it.
Take it from me. I have to return my shoes.
