The Great Deception.

That’s what many mortgage lenders are hoping their current customers will fall prey too.  Do you have a mortgage?  Then you’ve seen offers to refinance, and you’ve probably seen a bunch of them!  Every month I get something from my mortgage loan servicer that talks about the “benefits” of refinancing. 

I have a friend who has a 5 year adjustable rate mortgage that I helped him with back in the spring of 2005.  Now he’s about due for his first adjustment.  His mortgage servicer (the company he makes his payment to) has been sending him marketing material that is nothing short of scare tactics to encourage him to refinance.  He came to my office worried almost sick about what is going to happen with his payment in a couple of months.  He wants to sell the home and was contemplating a short sale, or his potential need to default on his mortgage all because his payment was going to adjust.  We looked at the actual terms of his mortgage instead of the scary letters and this is what we found…

His payment is going down over $400 per month!  Here are the details.  When his loan’s payment adjusts in March the interest rate will be calculated by adding a margin of 2.25% to the current LIBOR rate, now at .39% then rounded up to the nearest eighth.  If LIBOR doesn’t move up appreciably in the next 30 days (I predict it won’t), his interest rate is going to drop from it’s current 5.75% to 2.75%!  Too bad there is a maximum amount the interest rate can move in any given adjustment of 2.0% so his rate adjustment will actually bottom out at 3.75%. 

Now do you think he should refinance?  Even if interest rates begin to increase and do so consistently over the next several years after this first adjustment downward, his loan can only adjust 2.0% per adjustment so his payment can not increase beyond what he is currently paying for at least 2 adjustment periods.  That will likely give him enough time to sell the home when the housing market is in better shape, and he’ll be saving money while he waits. 

It’s true he could follow the “advice” (scare tactics) of his current mortgage servicer and refinance but he’d be spending thousands to do it, and would not benefit from the greatly reduced payment he’s going to have by doing nothing!  That’s what I call “The Great Deception”.

If you’re worried about your payment adjusting, let’s look at the facts before you do anything!   

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