Mortgages
-- Rate Hike Survival Guide by Cybele Weisser
June 2006
[Continued, page 3]
Option-Payment Holders
A Risky Loan Gets Costlier
Patent
litigator John Ramonetti isn't averse to taking risks. Two years
ago, John, 38, and wife Mona, 36, sold their home in Montclair,
N.J. and moved to Northport, Long Island, where they felt the
schools were better (for kids Adrian, 3, and Emily Jasmine, 6)
and they'd be closer to John's extended family. The couple closed
on a $700,000, four-bedroom home in December 2004, financing it
with 20% down and a loan that could best be described as Exhibit
A in the gallery of crazy mortgages: a $560,000 monthly adjustable-rate
option-payment loan. Not only does the rate move up or down 12
times a year, but the payment is flexible. The Ramonettis can
choose a minimum that doesn't even cover the interest (currently
$2,000), an interest-only payment or a sum that covers interest
and principal based on a 15- or 30-year loan.
Fortunately, John is averse to
debt -- he picked this loan because of the low initial rate. "I
hate paying interest and fees," he notes. So since taking out
the loan, the couple have consistently paid $3,000 to $5,000 a
month, enough to cover the 30- or 15-year interest and principal
payment, and often more. "I'd really like to pay the loan off
even sooner than 15 years," John says.
Mona
and John Ramonetti Northport, N.Y.
Loan:
$560,000 monthly
option-payment ARM
30-Year
Fixed Monthly Payment
now $3,452
could
rise to $5,785
But
lately, chipping away at principal has become tougher. When
the Ramonettis got the loan, the interest rate was 4.3%;
now it's 6.2%, so a higher portion of each payment goes
toward interest. The amount needed to cover interest and
principal on a 30-year loan has grown from $2,771 to $3,452.
If their rate ever hits its 12.3% max, it could cost them
$5,785 a month to cover interest and principal. Recently,
John took a look at the history of the index that determines
their rate and noticed that in the late '80s and early '90s
they would have paid double-digit rates. "I was a little
frightened by what I saw," he says. "What is the risk and
likelihood of those rates continuing to jump at the current
pace? I'm still ahead with this loan. Should I wait and
see if rates ease over the coming year or two, and get a
better fixed rate at that point?"
>> The Solution
Refinance into a fixed loan
Easy answer: Don't wait. The Ramonettis'
mortgage rate is based on the monthly Treasury average index (MTA),
which is currently 3.9%, plus 2.35 percentage points. Because
the MTA tracks changes in short-term interest rates over the previous
12 months, the rate on their loan is guaranteed to rise by about
a point in the year ahead. With rates on jumbo fixed-rate loans
only half a point higher than their current 6.2% variable rate,
they can lock in a payment ($3,549) for 30 years that's virtually
the same as what they pay now -- security that's worth the few
thousand dollars in closing costs.
If the Ramonettis are willing
to lose some flexibility in their budget, they can pay off their
debt sooner with a 15-year loan, which comes with higher monthly
payments but a slightly lower interest rate. Because the couple
aren't planning to move soon, planner Harwood suggests that they
consider paying a point in fees to drop the rate even closer to
6%, giving them a fixed payment of $4,712 a month.
The above information
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not intended to provide specific advice or recommendation. Neither
Mutual of America nor its information providers warrant the accuracy
or completeness of such information. The information is provided
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Some of the features discussed above may not apply to products
offered by Mutual of America. You should consult your attorney,
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legal or tax situation.
Patent
litigator John Ramonetti isn't averse to taking risks. Two years
ago, John, 38, and wife Mona, 36, sold their home in Montclair,
N.J. and moved to Northport, Long Island, where they felt the
schools were better (for kids Adrian, 3, and Emily Jasmine, 6)
and they'd be closer to John's extended family. The couple closed
on a $700,000, four-bedroom home in December 2004, financing it
with 20% down and a loan that could best be described as Exhibit
A in the gallery of crazy mortgages: a $560,000 monthly adjustable-rate
option-payment loan. Not only does the rate move up or down 12
times a year, but the payment is flexible. The Ramonettis can
choose a minimum that doesn't even cover the interest (currently
$2,000), an interest-only payment or a sum that covers interest
and principal based on a 15- or 30-year loan.