Professional
Insight
Through years of mortgage and real
estate experience it has become more apparent to a lot of people
that the appreciation and tax benefits of real estate is where
financial wealth comes from and not so much as to how much principal
balance someone pays down on a mortgage. Real Estate has skyrocketed
over the last 25 years and it has become harder for families
to realize the dream of owning a home. Libor loans not only help
you qualify for more home they will allow you options that amortizing
loans don’t.
The national average
that most people stay in a home is between 5 & 7 years,
why on earth would you take an amortizing 30 year fixed rate
loan, I know, because
your parents did and their parents did and so on. Let us try
to give you some insight on how Libor loans can signifantly
change your cash flow position, its important to understand
that we are in no way telling you that you will be saving money,
we are explaining with Libor Loans you will have options and
can decide for yourself how to use the principal portion of
your payment.
Here is an example
of a $500,000 loan comparing a 30 year fixed rate mortgage
to a 5/1 ARM Interest
Only Libor Loan, assuming you will move in 5 years, again the
caveat is if you don’t move you will be subject to the
rates five years from now and you may want to refinance, we
will take that into consideration also. The rates quoted below
are in no way an offer of a mortgage, it is pure speculation
of a scenario that could happen.
500K 30 year fixed rate jumbo mortgage
loan @ 5.875% - payment $2,957.69 per month for 30 years. Your
principal balance will be $464,547.20 after 5 years; you paid
down $35,453.00 or just 7% of the total loan balance in 5 years.
500K 5/1 ARM Interest Only Libor Loan
@ 5% - payment $2,083.33 per month for 5 years. This is $874.36
a month cash flow position or $52,461.60 in 5 years that you
have created for yourself.
This is a typical scenario of what we
see in the industry today. You benefit not only because your
interest rate is lower but you also have the option to decide
what you want to do with the principal portion of your payment,
college tuition maybe, pay down some credit cards, you decide.
With families struggling to make ends meet today or the financial
expert that wants to have additional options to use and invest
their money in other areas, these libor loans benefit both.
Okay lets look
a the possible down side. Five years from now you decide
you aren’t going to move
and assuming rates have moved higher, let’s look a possible
scenario.
500K loan, if you took the 30 year fixed
rate jumbo @ 5.875% you would still be paying $2,957.69 per
month.
Its five years later and rates have move
up to where they were a number of years ago, you might be looking
at this scenario. The average closing cost for a refinance
excluding escrows is about $4,000.00; this can normally be
added to your loan amount.
504K Fixed Rate Jumbo Loan @ 7.50% - payment
$3,524.04
504K 5/1 ARM Interest Only @ 6.50% - payment
$2,730.00
The payment of $2,730.00 per month on
the new 5/1 ARM Interest Only mortgage at the higher rate of
6.50% is still $257.69 per month less than the original mortgage
payment of $2,957.69 at 5.875% 30 year fixed. This is an additional
$15,461.40 in cash flow for another 5 years. In fact if rates
moved to 7% on the 5/1 arm your payments would be $2,940.00
per month still below the fixed rate payment.
These are hypothetical
examples but let’s
look at the bottom line if these figures were even close to
being true. Five years later and you decide to sell your home.
Assuming you bought the home for $625,000 and put 20% down
to give you a $500,000 mortgage and using a moderate appreciation
of home values of 4% per year your home should be worth about
$750,000.
30 year fixed scenario:
Sold for $750,000, present loan balance of $464,547.20. Realized
gain in appreciation
is $125,000 along with you’re principal that you paid
down $35,452.80 for a total of $160,452.80 at closing.
5/1 ARM Interest Only Libor Loan scenario:
Sold for $750,000, present loan balance is $500,000. Realized
gain in appreciation is $125,000 adding the cash flow balance
of $55,584.40 that you used however you wanted your total net
would be $180,584.40. Not only did you save money by going
with an interest only Libor Loan at a lower rate you were able
to use the principal balance portion as you wanted.
Each individual
scenario is different and we are by no means telling you
this is the best way to go, we just wanted to shed some light
on the potential savings and cash flow that these Libor Loan
products offer. Please request a quote from one of the Libor
mortgage professionals associated with our site, they can
explain in detail the different Libor Loan programs available
and give you an up to date Libor mortgage quote. Good Luck!!!
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