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Low, low, low rates won

As I See It

A record number of mortgages were refinanced in 2002. Americans enjoyed interest rates at their lowest levels in 40 years, and many of us took advantage of the low rates to refinance our debt.

The cheap interest environment continues into 2003, but it won’t last forever.

According to Ralph Hays with Mortgage Consultants in Jackson, the current 30-year fixed rate is 5.5% for home mortgages while the 15-year fixed rate is 4.9%. It’s about as good as it’s going to get.

Hays says that, in addition to cheap interest rates, residential real estate, particularly upper-end properties, are selling at a significant discount. It’s a buyer’s market. By way of example, Hays cites a particular Destin condo that sold for $750,000 four years ago and now appraises for $660,000.

This situation results from the listless economic recovery coupled with the threat of war with Iraq. People are simply sitting on the sidelines and waiting to see what happens. What will happen when the U.S. finally moves against Iraq or decides on a less extravagant solution? The economic recovery will grind on and, eventually, interest rates will go up.

Today is an opportunity for homeowners and potential homebuyers. Interest rates are at record lows and home prices are also discounted. Since higher rates and prices are inevitable, now is the time to make a move.

On a sobering note, both mortgage foreclosures and credit card delinquencies have gone through the roof over the past two years and experts think the trend will continue.

Also troubling, Americans are spending the proceeds of refinancing their houses rather than reducing the principal. Stories in various financial publications indicate that home equity is going for automobile down payments, vacations, furniture and other consumer items. In essence, homeowners are eating their equity. Shame, shame!

Baby Boomers are changing the concept of retirement since they are the first generation to reach their golden years still owing a home mortgage. The old rules of only needing 60% of pre-retirement income assumed that the home mortgage was paid off. The new reality: retirees are going to need almost the same amount of income in retirement as they had during their working years.

Actually, since they will, of necessity, continue working beyond the traditional retirement age, the concept of retirement as a time of golf and watching the grandchildren grow up is no longer accurate.

You can take advantage of the mortgage situation and eliminate that dismal scenario. Refinance at the cheap interest rates, using the equity to reduce the mortgage rather than making some discretionary buy, and set the mortgage on a 15-year term rather than the traditional 30-year arrangement. The lower monthly payment resulting from dropping the interest rate should almost offset the increased amount required to amortize the loan over the shorter period.

Tightening up the financial belt a notch can produce dramatic results at retirement. For those of us in the 50-something age bracket, or younger, converting to a 15-year mortgage means we will arrive at age 65, or thereabouts, with our homes paid off. Then, perhaps, we can really be comfortable on the traditional 60% pre-retirement income.

For those who have already refinanced their mortgages and have 30-year mortgage terms, you can get to the same place by paying a few dollars each month in extra principal payments. Any accountant or financial planner can tell you how much to pay extra each month to effectively convert your mortgage to a 15-year term.

Remember, a little financial inconvenience now can produce loads of happiness in a few short years.

Thought for the Moment — A government that robs Peter to pay Paul can always depend on the support of Paul. — George Bernard Shaw

Joe D. Jones, CPA, is publisher of the Mississippi Business Journal. Contact him at cpajones@msbusiness.com.


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