May you live in interesting times!! That is actually a Chinese curse if my memory serves me correctly. I would say we are in interesting times in the real estate industry. I heard last week that the LIBOR index loans are showing up again and that made me shudder a bit. I want to help you understand what that means and help you make an informed decision when it comes to finding a mortgage.
There are lots of different types of mortgages and generally I would recommend you get a 15 year fixed rate with a 20% down payment and that the monthly payment would be no more than 25% of your net income. If you listen to Dave Ramsey you will know where that comes from but if not you can check him out for more info on that.
I think that knowledge is power and if you don’t know what some of the other options are out there then you might be tempted to choose one that could get you into trouble. The LIBOR index loan is one of those that I think carries way too much risk. I am sure the ‘sophisticated’ borrower or lender might consider me narrow minded but I have seen too many good people trapped in a bad loan or over extended in such a way that they lose their home when bad things happen.
The concept of an index loan is not complex. Let’s talk about an index that we hear more about. The Fed Rate. That is an index. It is a rate that gets adjusted periodically and it is used to set the interest rate that banks charge each other to borrow money in the US. It is not a consumer rate but consumers watch it closely and make decisions based on it. The LIBOR index is a similar index. Check out the chart:
The LIBOR (London Inter Bank Offering Rates) index is just one of many indexes that are used to create an attractive loan when the index rates are low. That rate is beginning to drop and it tends to drop more quickly than some of the other indexes so we are starting to hear more about it now. From 2002 to 2004 the LIBOR rate was very low and that made it attractive to lots of people. But look at what it did starting about midway of 2004 and you can see why some of those people are now struggling to make payments. The rate went from just over 1% to about 5.5% very quickly and their home loans increased accordingly. They pay based on the LIBOR plus some fixed percentage (maybe 4%) so new they are paying over 9% for their home loan. This is the type of loan that we call an Adjustable Rate Mortgage (ARM) and is the subject of much wailing and gnashing of teeth today.
If you can qualify for a fixed rate loan you would never see this type of ‘adjustment’ when the economy changes. Be very careful what type of loan you get and if you have questions please call me. I am here to help you with all your real estate needs.
I would love to talk more about this with you if you have questions so don’t be afraid to ask if I can help.
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