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Rising Rates and Financial Hot Water

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Interest rates on home mortgage loans reached their highest levels this month since September of 2003. This means people with adjustable rate mortgages should hang on to something solid; monthly payments on these risky types of mortgage loans are skyrocketing. For investors however, these stair-step interest rate hikes have been a stairway to heaven. The Federal Reserve raised short-term interest rates for the 12th consecutive time, and there are more rate hikes on the way.

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Mortgage interest rates closely follow the yields on 10 year government bonds. Until now these interest rates have not been keeping up the Treasury bond yields. Once these interest rates catch up homeowners can expect to feel the squeeze on their monthly budgets. This is especially true for homeowners that may have purchased more home than they can afford using riskier interest-only and option type mortgage loans. Risky mortgage loans coupled with little or no down-payment is the perfect recipe for financial disaster as rates increase. If this describes your recent home purchase, refinancing to a fixed rate, traditional mortgage could be your only parachute.

Suppose for example you purchased a $250,000 home with a zero-down payment, interest only mortgage loan. Until recently you have been enjoying low monthly payments on the mortgage, albeit you have very little to zero equity in the home. Future interest rate hikes could easily double that cushy monthly payment when the principle kicks in. When refinancing these risky mortgage loans the single most important question to ask is how long you intend to stay in the property. If you plan on staying in your home at least seven years choose a fixed interest rate 15 to 30 year mortgage. When you do this you will lock in a low interest rate and build equity in your home. Last week the average interest rate for a 30 year fixed mortgage was 6.36%; historically this is still a fantastic interest rate. The average interest rate for a 15 year fixed interest rate loan last week was 5.89%.

If you only plan on staying in the home for less tan five to seven years you could benefit from a hybrid adjustable rate mortgage loan. This is risky however as you have no guarantees on what your monthly payment will be. Last week interest rates for hybrid adjustable rate mortgages (ARM) were 5.65%. Currently the monthly payment on an adjustable interest rate hybrid mortgage is approximately $90 less than a 30 year fixed rate mortgage on a $200,000 home.

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