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The interest rate of a fixed rate mortgage remains constant throughout the loan term. Payments are fixed and will not vary, and this amount is independent of the additional costs on a home including as property taxes and property insurance. Some lenders may require an impound account for both taxes and insurance. This benefits the lender by ensuring that these required payments are made.

If there is very little money down, the lender may require an impound account. But impound accounts can confuse the borrower who is not sure if those payments were actually made. In some instances they may continue to be billed by the county assessor and / or the insurance company.

Adjustable Rate Mortgages have become very popular lately. They are characterized by low initial payments which make it easier for the borrower to qualify. This allows borrowers to qualify and purchase larger homes.

The payments may be adjusted periodically with the interest rate tied to an index. Common indexes include the 11th District Cost of Funds Index (COFI), London Interbank Offered Rate (LIBOR), 12-month Treasury Average Index (MTA), Constant Maturity Treasury (CMT), National Average Contract Mortgage Rate, or the Bank Bill Swap Rate (BBSW).

Adjustable rate mortgages are usually easier to qualify for because the lender is protected from spikes in interest rates. But lenders and investors need to consider the default rates due to hybrid adjustable rate mortgages which offer an initial low payment period. After that period the loan payments are adjusted upward and may even double leading to defaults and foreclosures.

But what do the numbers mean in Hybrid mortgages? A 3/1 ARM means the payment is fixed for a 3-year period and a subsequent 1 year adjustment period. After a specified “reset date” the loan is free to adjust or “float” to the index specified in the loan documents.

When interest rates are high borrowers may prefer an adjustable rate loan. If a borrower feels that he or she may sell their home within five or maybe ten years, they may consider either an adjustable rate mortgage or an Interest Only Loan. If property values increase in that period the home buyer benefits because they invested less money compared to a standard Fixed Rate Mortgage.

Borrowers with Interest Only Loans pay only the interest for a specified period of time. Unlike Adjustable and Fixed Rate Mortgages, no principal is paid on the loan. At the end of interest only period the loan may convert to a regular amortized loan or a balloon payment may become due. The terms are spelled out in the loan agreement.

In the United States a five or ten year interest-only period is typical. After that time the loan usually converts to a regular amortized loan for the remaining term. For instance, a homebuyer may pay interest only for 10 years but then pays both interest and principle for the remaining 20 years of a 30-year loan.

Adjustable rate and interest only mortgages can help buyers qualify for larger loans and homes. There is a risk to both the borrower and note holder when the loan either resets or converts to a regular amortized loan. For this reason lenders will usually require a higher interest rate on these types of loans.

Homeownership offers many advantages when compared to renting. This presentation was not meant to be advice. Always consider all of your options and talk to loan and / or real estate professionals before making your decision.

Duration : 0:5:37

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Have you heard the news? It seems too good to be true and most likely it is. Believe me, having our economy jump started by creating a home purchase flurry sounds wonderful on paper and I would love to see it happen if it could work, but my concerns are laid out in the video. The biggest concern I see in the preliminary talk on this just accounts for new home purchases, not refinances. If this is true, the same critical problem that is occurring with FHA insured loans which had to put safeguards in place to stop this problem is a practice called “Buy and Dump”.

In some markets and more as this idea spreads, it is where a person would be living in a neighborhood and their neighbor’s home went into foreclosure on top of the decline they have already seen in their home value and they could get the same cookie cutter house for a 1/3 or more of what they owe or their value. Then they get qualified to buy the neighbors home stating they are going to keep the current as an investment and than once the deal closes, they stop making payments on their last home.

Add to the equation they can do this AND get a rate at 4.5%, this unethical phenomenon would continue at a scary pace. So as good as it sounds, there is a lot of safeguards to be worked out. Also, another concern is that people will get into homes they cannot afford because of the low rates and end up buying too big of home the cannot afford and when the economy does turn around and the rates are back at an average level, they will be in a home they could have not afforded without the rate drop.

So a lot to digest with this concept, stay tuned….

Please watch the video for more details of the financial and mortgage market happenings today.

Be Blessed!

Duration : 0:4:56

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