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Fed Speaks – Rates Up; Paying Off Student Loans With Mortgage; Interest-Only Loans

man sitting at home looks up interest-only loans on his laptopFed Chair Powell spoke yesterday and sent the bond market into a tizzy, as investors sold off their bonds and pushed rates sharply higher.

What crazy thing did Powell have the audacity to say? He acknowledged that the economy is strengthening and that there is an uptick in inflation.

In addition, a statement by the Fed Open Market Committee implied that rate hikes will start in 2022.

Whether the Fed will be able to raise rates remains to be seen, as higher rates could crash our over-leveraged economy with record levels of debt.

PAYING OFF STUDENT LOANS WITH REFI ≠ “CASH-OUT”

The “hit” for refinancing with “cash-out” can be substantial, increasing the interest rate for a refi by as much as 1/2% or more in some cases.

But, if refi borrowers are taking cash out to pay off student loans, there is no hit or impact to the interest rate if the loan is a conforming/Fannie Mae loan.

WHY WE DON’T LIKE INTEREST-ONLY LOANS

We offer “interest-only” loans, and they can save borrowers a lot of money from a monthly payment perspective.

For example, a $500,000 interest-only ARM with a rate of 3.5% would have a mortgage payment of only $1,458 per month.

While a fully amortized ARM at a much lower rate of 3.0%, for example, would have a mortgage payment of $2,108 per month.

We nevertheless discourage interest-only loans for three reasons:

  1. Higher Rates: They always come with much higher interest rates that add substantial costs over the life of the loan.
  2. No Forced Amortization: One of the things that makes real estate a great retirement tool is the forced amortization or principal paydown that comes with fully amortized loans. With interest-only loans, there is no principal paydown.
  3. ARMs: Most interest-only loans are ARMs or Adjustable Rate Mortgages that are fixed for only five to seven years. ARMs are great if borrowers have a short time horizon, but if they do not, we love 30-year fixed mortgages when rates remain so low overall and when inflation is looming.

Jay Voorhees
Founder/Broker | JVM Lending
(855) 855-4491 | DRE# 1197176, NMLS# 310167

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