Mortgage leads loans Rates

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 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!

Interest only products and the mortgage market don’t seem like they would have anything to do with an MSA, SEP or an IRA; but they can, and sometimes it’s to your advantage if they do. First, let’s explain what an MRA and IRA are, and how you can use them to your benefit. While offering the explanation, we’ll look at how they can be used in conjunction with interest only mortgages as a benefit to the consumer.

An MSA, or medical savings account is a tax-deferred way to save money, especially if you are self-employed, and do not have a 401k or medical insurance. The medical savings account gives you a tool for taking a deduction straight off your bottom line, thereby reducing the amount of tax you owe. The mortgage interest portion of your mortgage only provides a tax deduction in the form of an itemized deduction, and it is limited to a certain percentage of your income. Refinancing, or first-time financing of your mortgage with an interest only mortgage, can be used to pull more of the equity out of your home, or save money on mortgage payments that can be used to fund an MSA account. The biggest drawback to this kind of savings is the penalty you pay if the money is not withdrawn for its intended purpose, paying for medical expense. If you find yourself in a situation where you must have the money, and it’s not for medical expenses, you can pay up to 10% in penalties.

The IRA or individual retirement account works on the same premise as an MSA. The IRA is intended to give the consumer a way to save for retirement, when there is not a retirement plan where they work or they’re self employed. The interest only mortgage can be used in the same way as was explained above, and with the same restrictions. The IRA account is supposed to be used by the consumer as a tool for retirement savings; if the money must be withdrawn prior to reaching a certain age, there is often a 10% penalty to be paid on early withdrawal.

The SEP is the equivalent of the 401(k) for the self-employed individual. How does the SEP work? Basically, you as a self-employed individual can allocate up to $20k each year to be put into an SEP, or self-employed pension. The money is treated as tax deferred income, and it comes directly off your AGI, just as if you participated in a 401(k).

As you can see, the MSA, IRA, or SEP offer the consumer direct one-to-one savings by reducing their AGI, or the amount of income for which they are going to incur a tax liability. The mortgage interest portion of their itemized deductions is not a dollar for dollar reduction; it is limited to a percentage of your AGI. But what if you could find a way to benefit from both deductions? Would that not create a more beneficial tax and savings situation for the homeowner? Quite possibly, and the only way to assess your real savings is to sit down with a financial analyst and look at your individual situation.

The only way to really benefit from this possible scenario, however, is to make sure that you have ample savings from the interest only mortgage payment versus the traditional payment, to justify making such a move, and that the money will actually make it to a tax-deferred savings account.

What is the potential savings for the consumer? Well, imagine the following situation: self-employed taxpayer wants to buy a home. He has $10,000 available in cash to either put down on the house, or put into an SEP; his tax liability without the SEP will be $8,000. With the $10,000 SEP, he would receive a refund of $600.00. He can only afford to make mortgage payments of $600; the house he’s chosen financed with a fixed rate mortgage would be $826 each month. Using the interest only mortgage option, his monthly payment for the next 5 years is only $488 and the mortgage product does not require a down payment. It frees up the $10k to be put into the SEP and the taxpayer benefit will also include deductible mortgage interest. As you can see, with this illustration, financial planning and fully utilizing your options can make a tremendous amount of difference in your life.

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.