Saturday, August 23, 2008
Today my client visited me and insisted on refinancing his ARM that is coming due into a 30 year fixed rate loan. In his eyes the problem is, his 5 year interest only loan is going to adjust or 'reset', a word used a lot by media. His present loan is wonderful; 5.25% interest only but it resets in December.
It could have been so easy to simply follow my clients wishes and do a new 30 year fixed rate loan. He would have been happy and I would have earned a commission. But his index is the one year Treasury and that rate today is only 2.18% and my clients margin is 2.75% which means he will reset to 4.93% and his rate will go down for the next year. This loan is just over $600,000 and that means each percentage is $6,000 a year.
The best 30 year loan he could get today would increase his interest cost by more than $9,000 a year. Of course eventually the Treasury rate will go up but for right now it is too costly to consider. This is a smart person but my guess is that 95% of the clients don't know how to read the promissory notes and to determine what is going to happen on the adjustable rate loans that become fixed.
It is easy to spin any situation and I easily could have written a new loan but I try to put myself into my clients shoes and do for them what I would do for me.....darn it, sometimes I wish I weren't so honest but I have to live with myself.