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Insider Tips
A case for “Interest Only” I thought in this month’s column, it might be interesting to share an actual case history. I have changed the names and left out most of juicier details to protect the innocent. However it gives me a chance to highlight a real world common dilemma many people find themselves in. Having been through a divorce myself many years ago, I only wish something like these solutions had been available at the time. So let’s take a look shall we: Case Background: Mr. and Mrs. Jones were going through a divorce. They owned a home worth $500,000, with a 1st mortgage against it of $400,000. The current payment was $3000/mo., with tax and insurance. Mr. Jones wanted to keep the house for the two children to finish High School in the next three years. After accounting for potential sales costs, it had been agreed that net equity in the house was $65,000. Mrs. Jones wanted her share of $32,500 to buy a new home of her own, and was also going to receive $2000/mo. from Mr. Jones in alimony for the next 4 years. Mr. Jones made handsome living, but didn’t see how he could afford to keep the house, find $32,500 and make the new alimony payment. Solutions: After sitting down with Mr. Jones, I was able to show him several possible solutions. Three of these are illustrated below: 1st Option – Mr. Jones could get an Option ARM 1st mortgage of $437,500 at 1%. That would cover his closing cost and net him the $32,500 he needs to give Mrs. Jones. His new payment in the scenario is $1857/mo., with tax and insurance. That cleared up $1143/mo to apply against the alimony, which certainly gave him some relief! I could see he was happier than when he arrived. However, I cautioned him regarding the potential for deferred interest (PC for negative amortization) and we decided to keep looking. 2nd Option – Mr. Jones also checked out the Home Equity Line of Credit (HELOC) 1st mortgage program at Community First. Under this plan he could borrow the entire $500,000 at Prime + 1.75% (currently 6.5%), without any mortgage insurance. His new payment would be $$3158/mo., with tax and insurance considered. Not only could he pay the $32,500 to Mrs. Jones, but he would still have an extra $62,500 left over after closing costs. That meant he had over 31 months of alimony payments covered! Mr. Jones was openly grinning at this point, and I noticed him humming the tune “I will survive” under his breath. But I pointed out that Prime would be headed up substantially over the next couple years, with each future increase by the Federal Reserve. We pressed on! 3rd Option – Mr. Jones finally looked at a 5 year “interest only” ARM at 4.75%, in conjunction with a new (HELOC) 2nd mortgage. Since Prime is currently at 4.75%, this meant that in essence that Mr. Jones could lock in an “interest only” rate at Prime for the next 5 years. Between the two loans he could still borrow the entire $500,000 value of his home. His new combined payment would be $2523/mo., with tax and insurance. Looking at it this way he saved enough in his payment ($477/mo), that along with the extra $62,500 in cash, he had $1779/mo of the alimony covered for the entire 4 year duration. This left Mr. Jones with the house, the cash for Mrs. Jones, a net impact of only $221/mo. At this point Mr. Jones leapt across the table and gave me a huge bear hug. Since Mr. Jones is 6’8” and 280, I wasn’t about to argue with him. I was simple glad he wasn’t French. But you get the idea! So the moral to this story is simple. Before you panic and assume your financial ruin, Call Dan Smith. He can be reached at 303-674-2205 or visit him at www.ColoradoHomeLoans.com . Find out why we specialize in “Happily Ever After”. (Hugs welcome) © Copyright 2004-2007 by ColoradoHomeLoans.com |
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