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She's Sleeping Easier

Creative refinancing gives a condominium owner her bedroom back.


Lisa Marie Griffin had been sleeping on her sofa for nearly three years after giving up her condominium's spacious master bedroom and bath to a roommate. For the 36-year-old single mother, the $525 monthly rent from the roommate was the only way she could make the $1,190 payment for her Yorba Linda condo.

But after three roommates, Griffin and her 14-year-old son, Nathan, want to try to go it alone.

"I would eat beans first before I had another roommate," Griffin said, recalling roommates who would borrow cooking supplies and never return them or leave half-eaten jars of food in the refrigerator for months. "And sharing a closet and a bathroom with a 14-year-old boy is not exactly cool. He wants his space too."

To make it, Griffin--who earns about $23,000 annually and has worked for 12 years in maintenance at Disneyland--must find a way to make up the lost rental income. Although she's working toward a bachelor's degree that she hopes will help her increase her income in about two years, there's little chance for a raise in her current position. So she's considering a second job or selling her 2000 Honda Civic and getting a less expensive used car for her 25-minute commute to work.

But the solution to Griffin's dilemma may be as easy as refinancing, according to Roland Weedon, founder and president of Essex Mortgage in Orange, who said his refinancing business doubled in the last quarter of 2001 when interest rates fell.

Based on Griffin's perfect credit and long work history, Weedon was able to qualify her for a new $155,000 loan called a temporary 2-to-1 buydown. This type of loan, he said, is easy to qualify for because initial monthly payments are low. The loan is offered with a below-market interest rate for two years in exchange for paying more closing costs.

In Griffin's case, the $155,000 30-year loan that Weedon recommended would have a 3.875% interest rate in the first year; 4.875% in the second year and a 5.875% interest rate in years three through 30. Instead of paying $1,190 a month for her mortgage, her monthly payment would be $728 the first year and $820 the second. In the loan's third year, the mortgage would stabilize at $916 a month--still $274 a month less than what Griffin currently pays.

The two years' worth of lower payments, Weedon said, would give Griffin time to make it on her own without a roommate while she finishes her degree. In year three, when the higher interest rate kicks in, Griffin hopefully would have graduated and be earning more.

While a 2-to-1 buydown may look similar to a variable loan, it's not. Variables have interest rates that adjust over time and can cap at 6% higher than where they started, Weedon said. With a 2-to-1 buydown, the interest rate varies a predetermined amount in years one and two and then remains the same.

Not only would the refinance eliminate Griffin's need for a roommate, but the loan would also allow her to pay off the four years remaining on her car, a $2,000 balance on a credit card and put a few thousand dollars in her pocket.

"It sounds really too good to be true," Griffin said.

The downside to a 2-to-1 buydown is that estimated closing costs are higher than with a conventional loan. In Griffin's case, her anticipated closing costs on the $155,000 loan would be $8,900 compared with $5,000 for a standard fixed rate loan. But the closing costs would be financed as part of Griffin's loan, Weedon said.

About 10% of Essex Mortgage clients finance their homes using the 2-to-1 buydown option, according to Weedon. Typically, he said, the loan is a good choice for young couples or professionals just starting out who expect their incomes to increase in the future.

"I just hope [the loan] doesn't put Griffin back on the couch in the third year," Weedon said. "Even then, she'll have the higher mortgage but with no car payment and no credit card payment and she'll still be paying less than she does now without a roommate."

An option that Griffin could consider instead is taking the equity she has accumulated in the condo and buying another home. To find out the condo's worth, Stephanie Wisner-Abrego with Tarbell Realtors' Yorba Linda office pulled "comps"--short for comparables--of what other condos in Griffin's complex have sold for during the past six months. She found that Griffin's condo has appreciated about 48% since 1994, when her parents bought the property for $145,000. Her unit is now valued at about $215,000.

But other properties that Griffin might consider have similarly risen in price. Wisner-Abrego was not able to find any that would work for Griffin in Yorba Linda or Aliso Viejo and Irvine--areas where Griffin would be willing to relocate. In fact, she was able to locate only four properties in Mission Viejo that met Griffin's criteria of two bedrooms.

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