Smart Money: 1.25% interest-only loan too good to be true

Bruce Williams is a national radio talk show host and syndicated columnist.

Dear Bruce: I received an offer in the mail to refinance my home. It was an interest-only loan at 1.25 percent fixed for five years, and then at the end of five years, they would refinance the loan again at no cost at the same rate for another five years. We owe approximately $144,000 and want to pull out $15,000. The rep said the costs would be 1 percent, plus escrow. With a loan amount of approximately $159,000, the monthly payment would be $533, saving us about $340 a month in payments. Can you tell me if this is a good way to go and are there any pitfalls to doing an interest-only loan? We live in Las Vegas, and the prices on homes are going sky high. We purchased our townhouse a year ago for $145,000, and they are selling today for $200,000 to $215,000. T.D., Las Vegas, Nev.

Dear T.D.: I would have to see this offer in writing. There is absolutely no way that money can be loaned at 1.25 percent without some type of exorbitant fees and locked in for five years, and on top of that, to offer to renew it for another five. First of all, if it were that simple, why not just give you a 10-year mortgage at 1.25 percent? I think you're going to find it's 1.25 percent over a certain base number, perhaps the Wall Street Journal prime rate. This is a possibility. The other thing that we haven't addressed here is your income. I would be very interested in hearing from you with the specifics reproduced, not paraphrased. In today's world there is no way that an offer of this kind could be made as you have stated.

Dear Bruce: I'm trying to acquire financing for manufactured housing and sell my current manufactured home. Every lender is telling me that Freddie Mac has changed the rules and, as of Jan. 1, will not lend on a manufactured home unless it sits on a basement or foundation. What is the reasoning behind this? It's hard not to feel like this is discriminatory based on income. In my area, property values and housing are expensive and not everyone can afford a traditional home. Manufactured housing is a cheaper option to get out of paying rent. What should lower-income individuals do? V.S., via e-mail

Dear V.S.: I understand how you feel in terms of this being a discriminatory matter, but it truly is not. The reality is that some very well-known finance companies have gone into bankruptcy financing manufactured homes. There has been a history of people simply walking away from their loan. The default rate on what are effectively trailer homes is geometrically higher than those that are "stick built" and the homeowner owns the property. Legally, these are not homes; they are vehicles, and the rate of depreciation has been enormous. It is not a matter of discriminating against lower-income people as such, it is just that it has not been a viable business transaction. Lenders have tried to remedy this by insisting the homes be on permanent foundations, on property the individual owns, thereby increasing the value and reducing the default rate.

Dear Bruce: Several years ago, our banker got my husband and me into an annuity for approximately $25,000 each. We are both in our 70s and are taking minimal distributions. I have been reading so many negative reports about annuities. Is there any way for us to get out without paying a large penalty? L.C. Citrus Springs, Fla.

Dear L.C.: You mentioned that it's been several years. There's a good possibility that the penalty period has passed and you can convert this annuity to some other investment. On balance, I have little enthusiasm for annuities. There are certain tax advantages, but for people of your age and depending on your income, there are seldom advantages, and even some serious disadvantages. Whether it would pay for you to opt out is quite another matter. That would require someone who is knowledgeable to take a look at the annuity that you have and ascertain if there are any penalties and how the investments are going.

Dear Bruce: I'm sick and tired of the crummy interest rates that are being offered to me. All of my adult life I've worked like heck to get out of debt, and I'm finally at the point where I am showing positive cash and now, unlike the 10 percent to 18 percent I was paying when I was in debt, I'm being insulted with 1 percent on a money market account. It's my turn to get paid, and yet I can't find the paymaster. Do you have something in mind? L.T. Cleveland, Ohio

Dear L.T.: Lots of luck. It's unfortunate that you are in a lending mode, which is what savings amount to, rather than the buying mode, which is what borrowing is all about. Right now, interest rates have hit historic lows, and unless you're prepared to take a degree of risk, you're stuck with those. Corporate bonds will pay a higher rate of interest and, of course, there's always the market. Unless you are prepared to take some risk, for the time being you are stuck with these miserly returns. Many of us share your pain. Government obligations pay a bit more, but you must lock in for a specified period. If interest goes up, your equity goes down. Of course, if you hold to maturity you receive your full investment back.

Dear Bruce: We bought a house about six months ago, putting down $75,000. Because our credit is bad, they gave us a fixed adjustable rate mortgage for three years. We want to change this to a fixed 30-year. We have since paid off all the bills and have been paying everything else on time, yet we are still having trouble getting a new mortgage from other companies. Where do we go from here? The mortgage company we are with will help us but wants us to be in the home for one full year. I don't think mortgage rates will wait for us. They are at the lowest now. Please help us. D.C., via e-mail

Dear D.C.: I understand that you are anxious to lock in the low rates, but with lousy credit that very likely will not happen. You didn't tell me the percentage you put down, just a dollar amount. If it is a high percentage, there are many mortgage companies out there competing for borrowers that will cut you a reasonably decent deal. A 30-year fixed at a low rate is in your immediate future. Unfortunately, credit is easy to damage and takes a considerable period of time to repair. Even the higher rates that you have likely been quoted, by historic standards, are very low.