Variable-Rate Mortgage Refinancing

As monthly payments on variable-rate mortgages are starting to swell, many Americans have found a way to defer the day of reckoning. They have turned to variable-rate mortgages in recent years to afford a home as prices escalate. Refinancing with fresh variable-rate mortgages, for now, are successful in keeping keep monthly amortizations low. However, due to the fluctuating nature of variable-rate mortgage refinancing, their payments will likely rise even higher in the future.

Typically set at synthetically low rates during the first years of the loan, variable-rate mortgages are then reset at par with the prevailing market interest rates. The stake for borrowers was that interest rates would linger at low levels.

Recently, the first big wave of the mortgage boom is peaking as more than $400 billion worth of variable-rate mortgages, or about 5% of the total outstanding mortgage debt, will readjust in the current year 2006 for the first time. This figure is based on a projection made by Loan Performance, a research firm. In 2007, another $1 trillion of mortgage loans will readjust. When the readjustment takes place, a typical borrower, say with a $200,000 variable-rate mortgage could witness a nearly 25% increase in monthly payments as the mortgage adjusts from the introductory rate of 4.5% to the prevailing rate of 6.5%. Equivalently in total dollars, the monthly amortization will climb from $1,013 to $1,254. Confronting such imminent plight, many borrows are refinancing into their second or third variable-rate mortgage rather than paying more now, as mortgage industry experts confirm and loan data indicate.

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So far, the number of borrowers that opt for variable-rate mortgage refinancing is relatively small. However, mortgage industry analysts anticipate that the numbers will surge in 2007. Quite commonly, these borrowers are putting off any eventual shock of higher payments by another two to three years, if not longer.

For now, this refinancing boom is alleviating apprehensions that rising interest rates and higher monthly amortizations would induce some borrowers into foreclosure or coerce them to sharply cut back on other spending. Consequently, consumer spending may endure contrary to what some economists had expected.

Nevertheless, mortgage refinancing also corresponds to a doubling-down on a stake that housing prices will continue to go up especially in hot real estate markets such as Miami, Tampa and Sarasota. A value of a home that falls closer to the amount of the loan could curb the ability to refinance. As a result, this may prompt the homeowner to either sell the home or invest more in it.

Notwithstanding, borrowers still believe that loans make sense because many of them plan to move to another home in a few years or earn more. They refinance again, often using the same assumptions they held when they made their earlier loans.

Though it has been around for decades, the use of variable-rate mortgages has skyrocketed in the last several years, essential in triggering the housing boom by letting people borrow more than ever before.

Variable-rate mortgage loans come in many forms. While most have low and fixed introductory rates, other forms such interest-only option also let borrowers pay only the interest portion of the debt, or better yet, even less than that. After the introductory period ends, lenders readjust towards bigger payments while ratcheting up interest rates.

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For businesses engaged in real estate financing, variable loans and the refinancing they generate guarantee a continuous flow of dealings. Among the beneficiaries are banks, appraisers, mortgage companies, mortgage brokers, and Wall Street, where home loans are steadily bunched and traded as securities.