- The Washington Times - Thursday, July 8, 2010

Q. We have a rental condominium in Washington that I’m hoping to sell in the next couple of years. It’s probably worth $250,000 and has a $210,000, 30-year fixed-rate mortgage at 6.50 percent. I also have a 15-year fixed-rate $80,000 mortgage at 5.75 percent.

I want to take advantage of today’s rates and refinance both loans, but my loan officer said that because the condominium is a cooperative, financing can’t be found. He suggested we take out a new 15-year fixed-rate loan in the amount of $290,000, pay off the condo and have one loan secured against our primary residence. We can do this because our primary residence is worth more than $1 million.

The rate is great, but we don’t want to have such a high payment for 15 years. As soon as we sell the condo, we want to get rid of the $210,000 debt. My loan officer says that even if we make a lump-sum principal payment of $250,000, our payment won’t change.

As soon as we sell the condo, we want our payment to drop. Any thoughts?

A. You are a perfect candidate for a mortgage that offers an interest-only payment option because your payment will drop as you pay down the principal. Unfortunately, there aren’t many interest-only programs from which to choose anymore, especially since the transaction constitutes a “cash-out” refinance. The two mortgage giants, Fannie Mae and Freddie Mac, now owned by Uncle Sam, discontinued interest-only programs for cash-out refinances regardless of how much equity you have in the property.

Searching my portfolio of lenders, I did find one cash-out program that allows interest-only payments. It is a 30-year loan that carries a fixed rate for the first seven years and adjusts annually thereafter.

Though many folks will decry this 7/1 interest-only ARM as dangerous, this program may fit your objectives for the following reasons:

  • The 4.50 percent rate is fixed for the first seven years, and there are no points or origination fees.
  • There is no prepayment penalty, so you may make principal payments in part or in a lump sum at any time.
  • Because you have an interest-only payment feature for the first seven years, your payment can change every time you pay down the principal.

Let’s assume you take out a $290,000 loan and pay off the condo. Let’s also assume you sell the condo in two years and net $250,000, which you then apply toward the principal of the loan.

My calculator tells me that if you make the minimum interest-only payment of $1,088 ($290,000 x .045 = $1,088) and then make a lump-sum payment of $250,000 after the condo sale, your mortgage balance will drop from $290,000 to $40,000. If you then continue making a payment of $1,088 against the $40,000 balance, your loan will be paid off in full within 5 1/2 years.

This arrangement eliminates interest-rate risk because the loan can be paid off before the rate adjusts. It allows for a low mortgage payment for the entire life of the loan.

Henry Savage is president of PMC Mortgage in Alexandria, Va. Send e-mail to henrysavage@pmcmortgage.com.

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