Mortgage leads loans Rates

Not everyone that applies for a mortgage loan is a homeowner seeking to purchase their dream home, or their first home, or even their second home. Some of the mortgage market centers around individuals who invest in property for the purpose of increasing their investment portfolio, or building their retirement fund. What are the differences in the needs of the investor and the homeowner? There are some great differences, and then there are some basic values that every person seeks to fulfill when soliciting a mortgage product.

Let’s take a moment to examine the mortgage loan from an investor’s viewpoint, and determine how their needs and objectives differ from the average homeowner. As an investor, of course the objective is to make money. You want a return on your investment, preferably, as much as you can possibly get. This means that you seek the lowest interest rate possible, with the least amount of expenditure on your part.

The rising real estate prices, and the low interest rates, have generated much activity in the investment area of the mortgage and real estate markets, and many of these investors are fairly new to the investing game. So what are the best bets in mortgage loans? Interest only loans have everyone buzzing, especially the investor. Why? These loans require very little expenditure on a lot of real estate. Many of the interest only products out there today, do not require the homeowner to make a down payment, nor do they require the investor to make a down payment. Unlike traditional loans, the payment each month only requires that you pay the interest due on the principal. This equates to less cash out for the investor, and more retained for improvements to the property, or in the active solicitation of a buyer. Either way, the investor gets to keep more of his or her money, for the real objective, buying and selling.

Fueling the mortgage product market are the low interest rates, and the rising real estate prices. For many of the lending institutions, these investment properties are a fairly safe bet. Most of the investment property is in a resort or vacation area, and as the numbers go, these areas will only see increases in demand, not decreases. Also available in these areas, for investors and homeowners alike, are the jumbo, super jumbo mortagage, and 125 mortgage options. The jumbo and super jumbo require much more paperwork, normally a higher interest rate, and higher private mortgage insurance; but they also provide the huge amount needed to finance resort property during the construction phase.

The other great contributor to the real estate investment market is the coming of age for the baby boomers. Many of these individuals are reaching retirement age, and they have expendable, investment income. They prefer a safe bet, also. They prefer resort, retirement, and vacation properties, also. A great many of these individuals are investment savvy, and understand the different loan products available, and how to use them to their advantage.

It would be wonderful if the market continued to grow, and we continued to experience the wonderful effects of an ever-increasing and growing real estate market, but I’m afraid we are going to hit a few years, in a few short years, that will see a leveling, if not decline in real estate prices, simply as a result of the continued climb of these last few years.

However, for the investor today, the real estate market is a wonderful and exciting market on the move and on the rise. Take the time to seek financial advice, and in some cases legal counsel prior to jumping into the water; the need to prepare is just as necessary for investing as it is for average home ownership. The only black mark on this market would come from the volatility of real estate, in relation to the stock market, and the investor’s cash assets. If we should begin to experience problems in the stock market with heavy fluctuation, or spiraling portfolio balances, you could possibly see an effect on the real estate investing market. But, just like many other disasters, even though the possibility exists, our current market trends and projections do not lend debt credit to this potential threat. For the most part, the investment portfolio that includes real estate and the mortgage market seems to be climbing steadily!

Many of today’s consumers are financing their homes with interest only loans. Not very many of those consumers are aware that some of the grandparents, or great-grandparents also financed their homes with an interest only loan. I myself wasn’t aware that this type of loan existed prior to the mortgage market of today. But, we weren’t the first to use the interest only concept. During the Roaring 20s, many of middle-America’s citizens chose to finance their homes with interest only loans.

Why did they not remain popular, and does this tell us anything about the market of today? Well, let’s take a moment to examine the interest only loan of the 20s compared to the loan of today, and maybe we can become better educated shoppers.

The interest only loan of the 20s was a pure product. This means that the mortgages were interest only for the life of the loan. At the end of the mortgage period, nothing had been paid against the principal. Only the interest payments against the principal borrowed had been paid. This worked really well until the crash of the stock market and the Depression. At this point, many of the families that had lived in homes paying only the interest due were forced from their homes when there was no money and no jobs. Many lending institutions were left with foreclosed mortgages, and no cash. The traditional lending institutions at this point, simply shelved the interest only loan, in favor of more equitable lending; in other words, they preferred to loan money for a mortgage that would build equity. This gave the homeowner something comparable to savings, and the banker a lower outstanding mortgage balance.

That is a lesson we should carry forth when lending today, and using the interest only option. Most of the products offered today do carry a limit for the term of the interest only element. Generally, if the loan is a 30 year loan, no more than half can be used towards the interest only option. At least someone has exercised some level of judgment in providing for a cap, or limit to the interest only term.

In today’s society, everything we see encourages instant gratification, and home mortgages are no different. Instead of sending a message that says, if you want more house, you need more money, we send the message that it’s ok to borrow beyond your means. Now, in all fairness, there are some mortgage shoppers that fit the description of the candidate for the interest only loan. Investors, and candidates who do not intend to keep a home for longer than 5 years, do benefit from the interest only loan option. But for the typical homeowner, the interest only mortgage only prolongs the equity building process, and may often put the borrower in a situation where he or she cannot actually afford the payment when the principal and interest period begin.

Thanks to the booming real estate market, the interest only loan option, and the expansion of the mortgage product market, the increase in purchasing power has enabled many prospective homeowners to actually make a dream a reality. But at some point, the market will cease to boom, and the mortgage market will cease to expand. Will the consumer that purchased the interest only loan be able to afford the consequences, should the home suddenly not be worth the original loan amount? Let’s hope for the sake of the unwary homeowner, this is a situation we do not soon encounter. And, for the most part, I don’t believe we’ll see this any time soon. Thanks to the natural disasters along the gulf coast, and the continued demand for real estate and building materials, the housing prices we’re currently experiencing, along with the growth we’ve seen for the past couple of years, should continue at the same rate.

There are other, more stable loan products available, but these products don’t provide the kind of return for the mortgage lender that the interest only loans do. They also don’t pose the risk the interest only loans pose. The interest rates, however, are very competitive on these loans, and I don’t’ look for the general public to decide in favor of safety over savings. After all, nothing ventured, nothing gained.

In order to understand the theory behind the fixed rate mortgage, you have to understand the mindset of the mortgage banker and the mortgage borrower of thirty or forty years ago. The Great Depression left a tremendous impression on the minds of this country, so much so, that one of the popular mortgage products of the turn of the century, the interest only loan, was shelved, never to be heard from again. Not until the recent explosion in real estate prices and the mortgage industries efforts to accommodate home buyers of all types has there been such mortgage variety.

The trend after the depression, through post-war America, and really until the late 1990s was the fixed rate mortgage. That’s the type of mortgage the bank offered, and the public generally didn’t consider anything else. Why did so many individuals, as well as banking institutions popularize the fixed rate mortgage? This loan type, more than any other product available, was a security blanket for the banker, and the homeowner.

The banker, offering the mortgage loan, was assured of a 20% down payment and a secure monthly payment with a fixed interest rate that would benefit the bank. The homeowner received a set monthly payment amount that was affordable, and a fixed number of years to repay the loan, usually 20 or 30.

Since interest rates weren’t fluctuating then, as now, and real estate prices were fairly predictable, this was a win-win situation for everybody. Then came the extremely high interest rates of the 80s, and suddenly bankers were locked into mortgage with a fixed interest of only 7 or 8 percent. It is at this juncture that the lending institutions and the mortgage companies began to re-think the fixed rate mortgage. Maybe adjustable rate mortgages were better suited for such a fluctuating market; they could then reassess the interest rate if the rates skyrocketed. This wasn’t something the homeowner was in favor of using, but really what choice do you have? And usually, at some point, the rate will swing in the other direction. That’s exactly what happened during the late 90s and early part of 2000.

Since 2001, interest only loans, 125’s and ARMs have grown in popularity; on average, the interest only segment of the market is now around 30%. That’s an increase from 3% in 2001. The market has never before experienced the variety now available for mortgage products, but never before have we experienced the growth in real estate prices and lowered interest rates that we have seen in the last 5 years.

The beauty of all this growth, the fixed rate mortgage is like the little engine that could. It’s still around, still chugging up the hill, and still getting the job done. Statistically, many homeowners never payout their mortgage; they either sell their home or they refinance before the mortgage completes. This may be true, but for many of the homeowners I questioned, their home purchase was for the purpose of establishing a permanent residence, one in which to retire and live out their lives. That makes the good old standard 20 year Fixed Rate Mortgage look really good, even the 30 is still around (although not quite as appealing).
While there are places in this country that the real estate market has really boomed, and the real estate prices are soaring, there are still many that have not felt any effect, and for whom the appraisal prices of the 0s are still good today.

When you consider the trade-off for the adjusting interest rate, the flexibility of paying interest only, and the borrowing power of the 125, it’s hard to imagine that they are still homeowners who wish to use the fixed rate mortgage. That’s because, however you’re not looking at the entire picture. Many of these homeowners have experienced at least one job layoff. Many of the baby boomers that bought houses 10 or 15 years ago were getting ready for retirement, and many of the homeowners live on fixed budgets. The purpose in purchasing a home for the vast majority of these homeowners was to provide for themselves a secure, paid for place to live. These homeowners aren’t interest in how to invest the equity of their home, nor are they interested in the other options they could exercise when investing their mortgage payment elsewhere. They’re simple interested in paying for their home, and the fixed rate mortgage is the slow and steady payment that will accomplish this task.