The number of interest only and option ARMs now in circulation has led to fears in the financial community that a spike in foreclosures is inevitable. Interest only loans require artificially low initial mortgage payments on which there is no paydown on the principal owed. Option ARMs provide the borrower with four monthly choices of the type and amount of payment to make, a scenario that can confuse even the sophisticated borrower. In response, federal banking regulators have issued a businesslike warning to lenders about the dangers these loans, telling them that the banking regulators in Washington shared these fears.
Now these regulators have developed some consumer guidelines that are being distributed in a pamphlet explaining how these loans work. One indicator of the degree to which regulators and financial executives consider these loans misunderstood is the fact that the pamphlet includes a glossary of terms, such as ‘interest only home mortgages’ – an entirely new vocabulary that has entered the mortgage market and is considered unrecognizable by people accustomed to traditional lending practices.
The consumer pamphlet is a partial response to the issue that was developed because the increase in proliferation of these loans has increased so rapidly. In the Washington DC metro area, in the year 2000 less than two percent of the homeowners held such a loan. Since January of 2005, more than 40 percent of people buying or refinancing homes in the market took out an “exotic” loan. In the nation’s most expensive housing market, interest only home mortgages are probably the only loan that many buyers can afford.
These loans may work for some people but they are not for everybody, and 40% of all loans issued is a big portion of the market. To get the reader’s attention the brochure opens with a couple of those glossary terms. The first is "payment shock," which the regulators define as a mortgage payment that doubles or triples after an interest only home mortgage makes its rate adjustment.
“Negative amortization” is the next term for the reader to absorb. This occurs with option ARMs, a loan that allows the mortgage holder to continue paying a low interest rate while in the background, his interest rate is steadily rising. The result is that total indebtedness is rising even while the mortgager holder makes his monthly payments year after year. Ultimately, the loan makes a huge adjustment in the required monthly payment, and the mortgage has grown well beyond its initial amount.
The pamphlet has been issued by the Federal Deposit Insurance Corporation. Its title is "Interest-Only Mortgage Payments and Payment-Option ARMs -- Are They for You?" and it can be found at http://www.fdic.gov/consumers/consumer/interest-only/index.html One other, more general consumer brochure issued last year by the agency deals with mortgage shopping in general and includes a worksheet for comparing loans is available at http://www.fdic.gov/consumers/looking/index.html
Regardless of warnings and guidelines from federal agencies, the fact remains that sixty percent of all mortgages are issued by lenders outside of federal regulation. These lenders also tend to be the financial organizations involved in the “most abusive” loan practices, which an option ARM is considered to be for the buyer who does not understand the implications of the loan’s terms.
Is Now The Time To Buy A House?
At first this may seem like an odd question, especially given the front-page headlines of the past few weeks. But the reality is that selected properties in slow markets can be terrific buys.
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How To Play The New Mortgage Game -- And Win
Just when everyone thought they had the mortgage market figured out, whoops -- along comes the meltdown of 2007 and with it an end to many old borrowing strategies and ideas. Despite recent changes it's important to know that not only is real estate financing available, it's easily and readily available for most borrowers.
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Can FHASecure Save Your Home?
The big news from Washington is that the federal government is going to bail out many borrowers who now face foreclosure. Estimates vary regarding how many homeowners will be impacted, but the important point is that hundreds of thousands of loans are likely to be refinanced in the next two years under the new program.
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What's the Deal With Mortgage Insurance?
According to the National Association of Realtors the typical existing home sold for $230,100 in June. Imagine if the only way to buy such a property was to purchase with 20 percent down plus closing costs.
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Is Now The Time For A Line of Credit?
With all the tossing and turmoil in the mortgage marketplace during the past few months you might wonder if there is a financial safe haven, a type of loan that can help you through tough times. If you've owned your home for several years the odds are overwhelming that in most markets you have substantial equity.
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How Foreclosures Really Work
Because of recent headlines, it's not surprising that there are a lot of questions about foreclosure and how to avoid losing a home. Misconceptions about foreclosure abound, so let's look at what's actually going on and what borrowers can do if they face mortgage problems.
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How To Boost Your Credit Standing
Everyone will tell you that the key to getting the best possible mortgage is to have good credit. And folks will also tell you that the key to getting good credit is to pay bills in full and on time.
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Why Borrowers Want To Bring Home All C's
Back in the good old days, solid performance in school meant getting a string of A's and maybe a few B's. But when it comes to lending you can score best by doing well with four C's.
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Changing Standards Mean Refinance Now
If you want a lower mortgage rate or a smaller monthly payment then it's usually time to think about refinancing but at this moment there's another reason to immediately consider replacement mortgages: The standards for real estate loans are changing so if you have a need to refinance it may be best to update loans as soon as possible. Here's what's happening: The business news during the past few weeks has been filled with stories of failing mortgage lenders, especially subprime.
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An Insider's Guide To Home Prices, Profits And Inflation
About 75 years ago my grandparents bought a home in what was then a distant and exotic part of New York. Family legend has it that they paid $8,000 for a brick row house in Brooklyn, a property I knew as a child and a home which today has a market value of roughly $800,000.
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10 Ways To Avoid Predatory Lenders
They're out there. It doesn't matter where you live, how much you make or whether you're a saint or a sinner, predatory lenders want your business in the worst way.
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10 Reasons To Find Your Mortgage Online
It used to be that there was one piece of sure-fire advice for anyone who needed a mortgage: Speak with at least three mortgage lenders before financing or refinancing a home. Today such advice is as useful as typewriter ribbons.
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Which ARM Index Is Best For You?
A vast number of adjustable-rate mortgages (ARMs) are available today. There are interest-only loans with adjustable rates, plain-old vanilla adjustables and "option ARMs" -- mortgages with adjustable rates and a series of monthly payment choices during the first few years of the loan.
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What Do The 2007 Mortgage Loan Limits Mean For You?
The new loan limits for 2007 are out and -- ta da -- they're the same as 2006. But don't let such financial sameness fool you, loan limits are important and what you know about them could save you big dollars.
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Stated Income Loans: Five Things You Need To Know
If you're a borrower in good standing then the odds are overwhelming that you can get a mortgage without a lengthy look at how much you make. In fact, most lenders will simply take your word for whatever income you say you have.
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Where's The Real Estate Market Headed in '07?
Trying to figure out where the real estate market will head is always a dubious process. Economists of every view and persuasion can provide entirely opposite explanations to "prove" that the market will move up, down or sideways.
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Bad Credit Mortgages: The Inside Story
There's a lot of information concerning mortgages and most of it is directed toward borrowers with great credit. Alas, not everyone has the strong credit needed for super-fast loan applications or the lowest possible rates.
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Are You Ready For New Loan Standards?
The world of lending is about to change. For most borrowers new loan standards will mean nothing other than a little more paperwork -- but for many the new standards will mean something else, a reduced ability to borrow.
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Mortgage Relics: Are Seller Take-Backs For You?
With markets slowing in many areas it comes as little surprise that a growing number of owners are offering "seller contributions" to pay closing costs, bigger fees for brokers who bring in buyers and such things as riding mowers and even cars.
But perhaps the most interesting owner strategy is this: Why bother with lenders when a helpful owner will take back some or all of the financing you need to become a homeowner?
For those with "impaired credit" such offers may sound enticing.
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How To Profit In A Slowing Market
Across the country local real estate markets have become sluggish and weak. In many areas, unit sales are down and prices are holding steady or not rising at all.
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How To Get An FHA Refund
For many years the huge FHA mortgage program paid insurance refunds to borrowers. While the refund program stopped in late 2004, there are still millions of older FHA loans out there where borrowers may be able to get back some of their insurance money.
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How To Finance A $1 Million Home
Million-dollar homes seem to be increasingly common, a reality which raises a question: How do buyers finance such homes -- and how can you?
For many buyers the answer does not involve upper-income tax brackets or a few choice words in the wills of the rich and famous. Instead, buyers in the $1 million range are often long-time property owners who have seen their equity grow over time.
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20 Questions: What Are The Secrets of Today's Loans?
Not too long ago the world of real estate finance was a fairly simple place. Most loans were so clear that borrowers without advanced degrees in finance could reasonably compare marketplace choices
Those days are gone.
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Should You Refinance If Rates Are Rising?
When interest rates are falling the case for refinancing is clear and obvious. If you can save money each month without big cash costs to refinance then getting new a mortgage is a winner.
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Is The 50-Year Mortgage For You?
During the past few weeks several mortgage lenders have announced that they will now offer 50-year mortgages. This is a curious idea, but not as curious as it could be: At the height of the real estate boom in Japan some homes were financed with 100-year mortgages.
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The Truth About 10 Credit Score Myths
Credit scores are enormously important to both borrowers and mortgage lenders. In the same way that doing better in work, sports or at school produces real benefits, the same is true with credit scores.
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How Much Should You Borrow?
There's little doubt that we're borrowing more and there's also little doubt that credit is one of the great conveniences of modern life. That said, like Goldilocks you want to borrow the amount that's just right -- and no more.
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Homeowners Rejoice: Tax Breaks Are Here....
Let's be honest: April 15th is a day of reckoning, the moment when we find out what we really owe for taxes. In households nationwide wallets are drained and many who were rich on the 14th are greatly impoverished by the 16th.
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When Is The Right Time To Refinance?
One of the great mysteries of our time concerns the matter of when to refinance. It used to be that borrowers would refinance only when rates fell by 2 full percentage points, a standard which makes no sense in today's marketplace.
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Is It Time To Grab Your Home Equity?
If you bought a home in the past few years the odds are overwhelming that your equity increased. According to the National Association of Realtors, the value of a typical home grew by 12.
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A Mortgage Secret for First-Time Buyers: It Can Pay To Buy More
It's not easy to buy a first home, so here's a suggestion that may be surprising: Instead of buying one residence, buy several. What I'm suggesting has nothing to do with late night infomercials or books that promise fast and easy wealth from real estate.
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FHA Loans Look Strong
We take long-term mortgages for granted today, but it wasn't always that way. Long ago it was likely that if you financed a home you borrowed money with a five-year "term" mortgage -- and even then you needed 50 percent down.
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The Perils of Plastic
Millions of credit card borrowers are about to face larger monthly payments, a change that represents both good news and bad for consumers.
Under new guidelines suggested by the federal government, starting in January minimum monthly payments for credit card debt will generally increase.
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Has the "Bubble" Burst?
After watching home values soar during the past few years it looks as if real estate reality is finally about to set in. The home-pricing forecast for 2006 is mild and modest with higher prices projected for the year but not the double-digit increases seen in 2005.
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How to Get Your First Mortgage
When it comes to lifetime markers getting a first mortgage is a major event. With a mortgage you're magically transformed from occupant to owner and from tenant to titleholder.
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