John M. Lee: Creative Mortgage Solutions

With interest rates increasing to four-year highs, it's time to review financing options once again.

As of presstime, 30-year fixed rate mortgages have risen to a nationwide average of 6.8 percent, the highest level since May 2002. But for experienced investors of real estate, this is considered to be an extremely attractive rate.

As real estate prices increase, the mortgage industry has developed many financial products to meet consumer needs.

Gone are the days where almost all loans were 30-year fixed rate loans.

Now, buyers are getting more interest-only loans, adjustable-rate mortgages, short-term fixed rate loans, and other creative options. If you are in the market to purchase a home, carefully consider your options and financial goals before committing to a traditional mortgage. For example, if you know that you will be here only for a few years, consider an adjustable rate mortgage that has a lower start rate and increases slowly over the life of the loan.

Another option would be to consider a five-year fixed-rate mortgage that converts to an adjustable loan thereafter. These loans will start at a lower rate and it's locked-in for that period of time. Seven- or 10-year fixed loans are also available at slightly higher rates, but will be lower than 30-year mortgages.

During the first few years of adjustable rate loans, most of the payment goes toward interest and not much to the principal. So buyers who know that they will be moving within a few years often opt for interest only loans. They are issued at a lower rate and have been a very popular lately.

Homeowners with a home equity line of credit (HELOC) are usually tied to the prime rate, and have seen a doubling of their interest rates in the last couple of years.

So what do you do if you have a HELOC? The interest rate is probably at or around the prime rate, currently at 8.25 percent. If you can afford to pay it down, go ahead and do so and use the reserve from the loan as emergency cash. Or, you can convert it to a home equity fixed-rate loan. But, because your payments will include principal, it might be a larger payment than what you currently have.

Some of the larger banks have developed some new products with portion of the HELOC at a fixed rate and another portion adjustable. This might be a good option so that part of the loan is getting paid off. Also, look at refinancing the first and the HELOC loans together into one large loan. This strategy works well if the HELOC is large and the first loan is small. The lower interest rate on the single loan often results in lower monthly payments, which includes a reduction in principal.

Lastly, perhaps take advantage of some of the zero interest rate credit card advances available. There is an optimal financing instrument for every need out there. With the help of a good lender and by exploring your options, you should be able to find the product that meets your needs.

John M. Lee is a broker at Pacific Union. For questions, call him at (415) 447-6231.