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| Myths and Mortgages |
Some of the mortgage companies today, sell their mortgage
packages with every kind of mythical benefit known to man, from
the belief that interest only is a real mortgage that will
eventually payout (slight of words, there) to the belief that an
interest only mortgage carries a lower interest rate(which is
does, but only for the short term). Let's start with some of the
more traditional loans, and move into the weird and unusual.
There has been a tremendous jump in the available interest only
mortgage packages in the last three to five years so maybe we
should take a minute to break down some of these mortgages into
a language everyone can understand
There's a 3/1 ARM. A 3 year ARM, means that the interest rate is
locked in for 3 years. For the first month, the interest payment
is only 1%, for the next 3 years following only the interest is
due as the monthly payment. After the 3 year term, and for the
remainder of the life of the loan, normally thirty years, the
interest rate will change, and the payments will begin to
include principal and interest.
There's a 5/1 ARM. A 5 year ARM, means that the interest rate is
locked in for |
5 years. For the first month, the interest payment
is only 1%, for the next 5 years following only the interest is
due for the monthly payment. After the 5 year term, and for the
remainder of the life of the mortgage, normally thirty years,
the interest rate may change, and the payments will begin to
include principal and interest.
These mortgages also come in 7/1 and 10/1 ARMs, but analysts
really don't recommend extending the interest only option out
that far, since too many things can change before the 7 or 10
years is up.
The 10/30 interest only mortgage works in the following way: you
borrow money in the form of a 30 year mortgage, with a fixed
interest rate. The first 10 years are interest only payments,
with the full amount of the principal being amortized (interest
payments included) over the last 20 years of the loan.
The 15/30 interest only mortgage works in the following way: you
borrow money in the form of a 30 year mortgage, with a fixed
interest rate. The first 15 years are interest only payments,
with the full amount of the principal being amortized (interest
payments included) over the last 15 years of the |
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loan.
These mortgages are really appealing to the consumer with any
sort of investment knowledge. If I were going to borrower with
the interest only mortgage option, it would be one of these two,
the 10 or 15 of 30.
Now what other myths can we find? There's the belief that the
home mortgage income tax deduction is a substantial benefit to
the taxpayer, and that 1% interest only loans are for the life
of the loan! Ha! There's also the balloon note myth that
proliferates the belief you can automatically refinance through
your current lender when the note matures, or that adjustable
rate mortgages are a better deal than fixed rate!
Another mythical idea is that the real estate market can't go
bust. An exploding growth rate in the mortgage loan industry,
and the continued surge in real estate prices, has put the
interest only mortgages in a huge category all their own. Up
from the first part of the century, the interest only mortgage
loans are now garnering nearly one-fourth of the mortgage loan
market. That kind of growth is almost frightening, to even the
most experienced lender. Can you imagine the possibilities, say
four to five |
years from now, when many of these loans come due
to pay the interest and the principal; what happens if our
economy isn't still a thriving bustling place?
The benefit of the interest only loan is that the consumer is
eligible to buy much more house, than with a standard mortgage.
That's great if you're certain in a given period of time, you'll
be able to afford a higher mortgage payment. But is anything
guaranteed and given in this day and time? What if you can't
afford the payment when the interest only term expires?
We have only to look at the disastrous consequences of the crash
of the stock market during the 1920s to appreciate where this
may be leading us today. Many people had financed their homes
with an interest only mortgage, and when the stock market
crashed and there was no work, they lost everything, including
their homes.
So, we not only promote mythical nursery rhymes, we promote
mythical mortgages, too!
About the author:
Tony Robinson is a Real Estate Investor, Webmaster and
International Author. Visit http://www.ezy-mortgage.com/ for his
tips on mortgages.
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