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Last Year's Great Mortgage Is This Year's Disaster
By: Charles Essmeier
The market for real estate in the United States seems to have slowed down from
the fever pitch of just a year ago. There are a number of reasons for this;
rising interest rates and sticker shock among buyers are just two of them.
Whatever the reasons, sales of homes seem to be slowing, and that trend will
probably continue in the near future.
That being the case, several types of loans that have recently been very popular
have suddenly become poor choices of financing for those buying homes. While
some types of loans, such as the 30 year, fixed-rate mortgage, are usually safe
choices, others, such as the interest-only adjustable rate mortgage (ARM) and
the Option ARM have suddenly become not only poor choices, but potentially
dangerous ones, as well.
The interest-only ARM was a great choice just a year or two ago among real
estate investors. It permitted the buyer to make low monthly payments for the
first few years of the loan that compensated the lender only for the interest
that accrued on the loan. Payments did not apply even one cent towards reducing
the principal. After a period of 3-5 years of interest-only payments, higher
payments that applied a portion to the principal would kick in. Buyers,
especially investors, weren't too worried about not paying towards the
principal, as prices were rising so rapidly that the buyers were building equity
in the property just the same. That is no longer the case, and anyone who takes
out an interest-only mortgage today might find that, in five years time, he or
she owns just as little of the property as they do today.
The Option ARM is even worse in today's climate. This somewhat flexible loan
allows the buyer to make four choices each month regarding how much to pay – a
"minimum" payment, an interest-only payment, a payment based upon a 30-year
repayment schedule and one based upon a 15-year repayment schedule. Those who
really cannot afford the house in question most often use this type of loan. The
touted "minimum" payment, which seems quite small, is really misleading. That
payment not only contributes nothing towards the loan principal, but it doesn't
even cover that month's accruing interest on the loan. After making a minimum
payment, the outstanding balance on the loan will actually increase. When prices
were going up, this type of loan was seen as bullish. With house prices
stabilizing, and even beginning to fall in some markets, this type of loan will
leave many borrowers owing more than their homes are worth.
As times change, so do the needs of homebuyers. At the moment, it seems that
housing prices are either stabilizing or falling. That being the case, a loan
designed for people in a market where prices continually go up is probably a bad
choice today.
About the Author:
©Copyright 2006 by Retro Marketing. Charles Essmeier is the owner of Retro
Marketing, a firm devoted to informational Websites, including
www.homeequityhelp.net, a site devoted to information regarding home equity lending.
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