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I get a lot of email. Some are linking requests. Some are spam that somehow get through GMAIL’s spam filter. Some are mortgage requests. Some are mortgage questions. Some are mortgage vendors trying to sell me something.

On Sunday, I received a well written argument from a reader who asked me to post his response to the Denver Post article NO MONEY DOWN: A HIGH RISK GAMBLE.

Phil,

I enjoy frequenting your blog, and wanted to be sure to share this with you. I am an independent Mortgage Broker with my own company Source Financial LLC, and I wrote an extended response to The Sunday Denver Post’s lead article from September 17, 2006 entitled “No Money Down: A High-Risk Gamble” [www.denverpost.com/ci_4347686].

I found the Denver Post article to be riddled with misrepresentations, one-sided accountings, and dangerous misinformation, all supporting a traditionalist approach to mortgages that has put two-thirds of all families into home ownership, but yet has led to a situation where the average fifty year-old American is worth negative $7000, only 5% of Americans retire at age 65 in financial dignity, and 9 out of 10 Americans die in debt.

In reference to my 2000 word response, Denver Post Business Editor Stephen Keating indicated that “I will take the time to read it and digest your observations, and discuss it with the rest of the reporting/editing team here.” Article author and Denver Post Business Writer Greg Grifffin wrote “This is a well-reasoned and well-supported argument. I don’t agree with everything you’ve said, but you’ve managed to get me thinking.” Unfortunately, checking today’s (September 24) Sunday Denver Post and www.denverpost.com, my response remained unpublished…

A Response to “No Money Down: A High-Risk Gamble” – The Sunday Denver Post, September 17, 2006 lead article [www.denverpost.com/ci_4347686]

As an independent Mortgage Broker that owns my own company, Source Financial LLC, in addition to being affiliated with a larger mortgage company that handles the processing and servicing of my loans, Lion Financial Corporation, I read the lead article “No Money Down: A High-Risk Gamble” with great interest. Knowing that a lot of folks along the Front Range turn to the Denver Post as an objective source for information, I was shocked and dismayed by much of the information and conclusions that were put forth on a topic that already invokes a fight or flight response among many home owners.

100% financing loans have been an amazing tool that has greatly contributed to the 5% increase over the last twenty years in percentage of homes occupied by the owner. But it is not the lack of equity that is putting these borrowers into jeopardy, it is a lack of a flexible asset base to deal with changes that has been increasing the risk of these folks defaulting. In general, people that utilize 100% financing for home purchases usually are lacking the liquid assets, emergency funds, and overall wiggle room to deal with financial hardship.

Of course lenders usually have guidelines concerning liquid asset reserves that must be held by the borrower in order to qualify for a loan, but often they only require enough to cover two to four months of mortgage payments. When people do face catastrophic events rightfully referenced by the Denver Post, “job loss, medical problems and divorce,” those reserves can often quickly disappear.

But having equity in one’s home when faced with these situations does not “give homeowners options when they face financial problems,” because it is precisely when folks are facing such dilemmas that they are quite often unable to qualify for refinancing, as at that point in time they are too high risk of a borrower for lenders to work with. As a Mortgage Broker I am deeply disturbed by this fact, but unfortunately it is a reality that we all must face when dealing with banks and lenders.

And probably the most misunderstood aspect of homeownership is the fact that equity is a ZERO PERCENT RETURN INVESTMENT. Yet two-thirds of Americans hold the majority of their wealth in home equity, which is a non-liquid asset that gives them absolutely zero return. Many people confuse appreciation, which is the increase in home value due to market trends, with getting some kind of return on their equity, but that is a common misconception. That is why it is so important for homeowners to separate their equity from their home via refinancing, and put those “cashed out” funds into investment vehicles that offer an actual rate of return. In doing so, homeowners increase their overall liquidity, improve their capacity to face emergencies, reduce their financial risk, increase their rate of return, improve their tax deductions, and diversify their investment portfolio.

Instead of spending their liquid asset base (savings) to finish their basement and send money to their parents, such as in the case of Jose Garcia and Maria Vanderhorst, borrowers with 100% financing have to exercise greater financial discipline. And putting money down and getting into a 30-year fixed would not have improved their situation, as then their down payment would be tied up as equity, which is a non-liquid asset, money that can only be accessed through refinancing or by selling their home.

100% finanacing loans are not dangerous, what is dangerous is borrowers not having a liquid asset base to deal with life’s contingencies. Unfortunately, these are the type of borrowers that tend towards 100% financing, as it really is their only option for home ownership. And tying up their wealth in the straightjacket known as equity is not part of the solution, it is part of the problem. An incredible means to access equity for the purpose of greater fiscal flexbility and all the other goods mentioned above, or “cashing out equity as one goes,” is the Option-ARM loan, which received quite a misguided slamming in the Denver Post article.

The Payment Option Loan gives the borrower four different payment options each and every month: they can make an Interest Only, 30-Year amortized, or 15-Year amortized payment based upon the fully indexed interest rate, or they can make the minimum payment that is based upon a very low “start rate” (usually between 1% and 4%), which involves deferring interest (a.k.a. negative amortization), or adding the difference between the Interest Only payment and the minimum payment onto the principal of the loan. Now while most lenders offer the Payment Option Loan with an adjustable fully indexed rate, one that starts adjusting as early as the first month, some lenders offer the Payment Option Loan with a fixed interest rate for the first five years.

The Payment Option Loan has proven to be a favorite of Real Estate Investors and Real Estate Agents, as it frees up extra cash flow on a monthly basis for much greater investment opportunities. Knowing that equity is a zero percent return investment is some powerful information to have.

The annecdote concerning Louis and India Harts conflated the fixed “start rate” with the adjustable “fully indexed rate”, such that readers were left with the impression that the Harts’ interest rate went from 2.6% to 8.1%. The start rate, which determines how much the minimum payment will be, is not a “teaser rate” that “quickly shoots up”. Some lenders do gradually increase the minimum payment itself (not its determining start rate) on an annual basis, usually somwhere in the range of 7.5% per year, to keep the borrower from deferring too much interest. But the start rates is always otherwise a fixed rate. It is the fully indexed rate, upon which the Interest Only, 30-Year amortized, or 15-Year amortized payments are based, that is adjustable is this case. And this fact is consistent with the numbers quoted in the article: the minimum payment of $919 the Harts are making would be the combination of $721 (2.6% start rate on a $180,000 loan) and $198 of escrowed Property Taxes and Hazard Insurance, which is approximately what they would be for such a home.

In the Harts’ particular case, they are going to have plenty of time to refinance before their loan starts to recast when the principal hits 115% (which would be $207,000 in their situation), as they will be well below that total when their three year prepayment penalty period is up. So the answer to Louis’ “I don’t know how we’re going to do it,” is that when those three years are up, they’ll refinance and get themselves into a loan that they feel more comfortable with and educated about. Though given their situation, if properly understood the Payment Option Loan really is their best option.

My question is how can mortgage products themselves be blamed for foreclosures? At best the article points towards a correlation, but demonstrating causation surely requires more than offhanded references to what some unnamed experts stated the next wave of defaults “may” come from. Beyond unpredictable catastrophic occurences like job loss and overwhelming medical bills, foreclosures occur because borrowers are getting into loans that they do not understand, and often they do not know that they do not understand the mortgage product. It is the responsibility of the Mortgage Broker to completely explain all the details of any mortgage product to the borrower. But it is also the responsibility of the borrower to be certain that they understand the terms of loan before signing off on it at closing. Vehicles and guns both kill in the range of 35,000 Americans each year, but it is the human misuse due to lack of education, ignorance or simple negligance that creates this reality, much like in the mortgage scenario.

Every different mortgage product serves its purpose, and what works for one borrower will not work for another given the specifics of their situation. To label certain categories of loans as “high-risk gambles” or as leaving “no room for slips” ignores the millions of families that are in these loans and find that they very much work for them. It is also a disservice to consumers to mislead them with such one-sided representations.

The true irony of the lead piece in September 17th Sunday Denver Post is that the conclusion that “Option-ARMs… could fuel a surge in foreclosures in the next few years” is the opposite of what we find is actually going on in the mortgage industry, as Payment Option Loans have proven to have the lowest foreclosure rate of any mortgage product currently on the market. World Savings is a bank that specializes in this product, which they refer to as the Pick-A-Pay Loan, as more than 90% of the loans they outfit borrowers with are of the Option-ARM variety. As a lender they have less than a 1% percent foreclosure rate! But World Savings, along with the independent Mortage Brokers like myself that they work with, take on the responsibility of educating the borrowers as to how to properly and smartly manage this incredibly powerful mortgage product.

A lot of mortgage brokers I know will not touch Payment Option loans, but I believe that is primarily because they are not all that interested in educating the consumer. Why not just throw them into a 30-year fixed APR mortgage? Everyone pretty much knows how that works. But that is also how banks make of the most money off of borrowers! The “list of higher-risk, alternative mortgages” the article refers to are not only not necessarily higher risk (Payment Option loan has the lowest risk, as discussed above), but they also provide the borrower the opportunity to increase their monthly cash flow by lowering their monthly mortgage payments by as much as 40%. In this way consumers are empowered to “become the bank” and grow their own investment portfolio, rather than falling into the trap of handing over their hard earned capital to the banks in the form of a large down payment or paying down principal so that they can have more of a zero percent return investment, equity.

Affiliates of Lion Financial Corporation, like myself through my company Source Financial LLC, do not shy away from the privilege or responsibility of educating our clients how to properly utilize alternative mortgage packages. And why is this? Because when families are taught smart mortgage product and equity management, they learn to utilize their mortgage as a financial tool for building wealth, which easily makes a $500,000 to $1,000,000 difference for the borrower over the next fifteen to twenty years. The affluent have always understood how to leverage their mortgage, pay as little down as possible, and keep very low monthly payments in order to increase cash flow for investment purposes. The American middle class is being transformed by engaging in these very same concepts and increasing their fiscal discipline, and I absolutely would not have it any other way.

Brent Ritzel
President/CEO, Source Financial LLC
Denver, Colorado, USA
An affiliate of Lion Financial Corporation
303-590-8999
Brent.Ritzel@lionfinance.com

Editors Note: Due to the mortgage crisis, 1% mortgage loans may no longer exist. Visit our home page if you’re in need of a mortgage loan in Denver.

Many mortgage lenders advertise loan programs with rates in the 1 per cent range. We also offer a full variety of these types of loan programs but borrowers must realize that the 1 per cent aspect can be a little misleading. All programs that you see advertised with 1, 2 or even 3 per cent rates these days are payment option programs. These are great programs for certain borrowers but are misunderstood by many.

Exercise caution when following up on advertising that boasts a loan with a 1 percent interest rate. These loans are not for everybody and they are some of the most misunderstood loans available. There are many newer mortgage professionals who are not even fully aware of exactly how these programs work, and they are selling you on the fact that you have a fixed rate and payment of 1% for 5 years. Your minimum payment will usually go up by 7.5% each year. This means that if you have a $1,000/month minimum payment, the next year this payment would go up to $1,075. Also, most likely this minimum payment is still resulting in negative amortization. The 1 percent rate that you are being advertised and told is fixed for 5 years is actually only the basis of your minimum payment required on the loan. Your actual interest rate on the loan will be your margin (which is normally anywhere from 2% up to 4%) plus your index (which can be LIBOR, MTA, COSI, etc…). Therefore, you would actually have a much higher interest rate on your loan than 1%. These types of mortgages will allow you the most flexibility in your monthly payments and can help maximize cash flow, however they are not a good mortgage choice for every borrower. This is one reason to make sure you have an honest, experienced mortgage broker to work with, for all of your mortgage financing.

As long as your mortgage professional explains clearly how your payment works you should be fine. Most people run into trouble with this type of program when it�s not properly explained. There is no way your principle will go down if your payment is based on a 1% rate when your balance is being charged a higher rate.

Often times rates advertised this low are nothing more than a teaser rate. It makes for a nice sign or ad but the fine print tells you that this is an intro rate. Most convert to a normal rate in 30-90 days. Your mortgage professional can explain these type programs to you.

Before you decide to enter into a negative amortization program make sure that your mortgage broker fully explains the program to you and how it works. This type of loan is very useful to some borrowers but is not for everyone.

When you pay an interest rate that is below market average, such as with a pay option loan, you have a negative amortization loan. Basically, you are paying a much higher interest rate, but your payments are based on the low interest rate. The difference in payment is added to you loan balance each month. If you make the minimum payment every month, your balance will increase, and you could end up owing more than your home is worth.

Many homeowners are using the appreciation in there homes to get rid of high rate credit cards by consolidating. When you consolidate your loans you often reduce the amount of money your spending each month.

One of the main benefits to refinancing is to consolidate consumer debt. Consumer debt (i.e. Credit Cards ampersand Auto Payment) is typically at a higher interest rate and is never tax deductible. Interest paid on debt tied to your home is deducted from your income at the end of the year often substantially reducing your tax liability. This tax favorable status is one of the many benefits of refinancing.

Refinancing your home can save you hundreds per month when you consolidate debt.

What if you want to add on, remodel or update the kitchen? You may not have the cash to do so, but the cost of improvements may be more than covered by the increase in value of the home. This is a great use for a home equity line of credit or a cash-out refinance.

Many people refinance to change from a variable rate to a fixed one or vice versa. Refinancing a high interest rate after a 24 month good payment history could save you a lot of money on your monthly payment.

If planning to purchase investment property, refinancing your primary residence is a great way to raise the cash for the down payment required.

Always consider your long term benefits of doing a refinance. The interest rate is not the most important aspect of the transaction. Even if your current rate is lower, you will probably save more money over time with a debt consolidation refinance then you would be with maintaining the situation you are currently in. Ask yourself a few questions: How long have I had this balance on my cards? At the rate I am paying my credit card debt down, how long will it actually take to pay them completely off? What will be my total cost once I have paid off all my credit card debt?

You can refinance to switch to an interest only loan to maximize cash flow or to switch to a Pay Option ARM to provide yourself with a lot of flexibility in your monthly mortgage payment. Some people also refinance simply to get a way from their current mortgage lender because they are not pleased with them.

Another main benefit of refinancing is to get out of PMI (Private Mortgage Insurance). In most cases if your Loan-To-Value was above 80% when you moved into the home then you most likely got stuck paying PMI. Your home may have appreciated quite substantially over the past year or two and with a new lender they will take new appraised value thus eliminating PMI.

Most people refinance to because of changes in their financial situations. Some, after determining that they can afford a bigger mortgage payment, refinance to a shorter loan term to save on the total amount of interest charges. Others, after experiencing a decrease in income, may refinance to a longer term loan to take advantage of the lower monthly payments. Yet others refinance to withdraw from the equity built in their homes for other financial purposes.

Using equity in your home to pay off high rate loans (credit cards, auto loans, etc.) may have certain tax benefits also. Consult your CPA for more information.

Many homeowners refinance to pull out cash to purchase another property.

To reduce the term or length of your loan, doing so can save you thousands of dollars in interest.

Editors Note: Due to the mortgage and credit crunch, interest only mortgages are more difficult to obtain. If you’re in need of a Denver home loan contact us to discuss your mortgage options.

Paying interest only is a great way to minimize housing expenses per month. The concept of this type of payment structure is to allow you a set amount of time in which your payments will be based off of interest only. Every borrower should keep in mind that this loan will not pay down any of the principal balance during the interest only portion of the loan.

Why pay interest only - do you think you will ever really pay off your mortgage? How do you gain equity in your home? Is it from paying down your principal or more so from the market appreciation of your home? When you consider these things paying interest only and having the extra cash flow often makes good sense.

Examine every loan option with your mortgage broker before you decide on a interest only loan program. Your mortgage broker will be able to determine if the interest only option is a good fit for you. This will ensure that you are not frustrated by an uninformed decision years down the road.

Many lenders charge a small premium in order to have interest only premiums, usually 1/8th or 1/4p point. Make sure you discuss this with your mortgage broker as well.

With an interest only loan you will still build equity in your home even if you only make the interest only payments and never apply any extra payment towards the principal. This is achieved because your house is always going to appreciate and gain value (unless you live in a community with declining home values, which is not very common). Therefore, You can still gain equity in your home while freeing up cash to pay down other bills, invest, and/or just to simply put save for a rainy day.

Many people choose interest only loans to increase their cash flow and not be encumbered by such a huge mortgage payment.

With any type of interest only loan you can choose to make additional payments to reduce your principal balance. These type of loans work very well with borrowers whose income may fluctuate on a monthly basis or borrowers who know they will be receiving a pay increase in the future and want to minimize the monthly payment until they have a larger income.

Interest Only loans allow you to purchase a larger house without increasing your monthly mortgage expense and it gives you mortgage payment flexibility to better manage your monthly cash flow without deferring interest.

Paying interest only may free up needed cash flow to help make payments on an investment property you may want to purchase.

Often times a real estate investor will want an interest only loan. The low minimum payments help to increase cash flow for other purchases.

The use of interest-only loans was unheard of just a few years ago, but in the last year these loans have exploded, giving many home buyers leverage against escalating home prices and enabling them to buy homes. A recent Wells Fargo survey of American homeowners showed that the majority of homeowners do pay principal on interest-only loans when they are flush with cash. 73% pay both the principal and interest at least some of the time. Only 25% pay only interest all of the time. Interest-only options on home loans give the home buyer the flexibility to choose how much to pay on their mortgage each month - just the interest-only payment or a little extra to pay down that principal.

Interest Only mortgages require monthly payment of “interest only” for a specified period, usually the initial 10 years of a 30 year loan term. At the end of the interest only period, the loan is re-amortized to pay off the mortgage in the remaining 20 years. The monthly payments will naturally be much higher compared to that of the interest only period. In practice, most homeowner refinance before the end of the interest only period. The disadvantage of Interest Only loans is in that the homeowner will not build equity during the interest only period. There is also the risk that the home has since lost value when it comes time to refinance.

Paying interest only may allow you to contribute to your 401k, or IRA retirement account, because of your new lower monthly payment.

Interest only loans can also be of value for borrower’s seeking to consolidate other debt carrying high interest rates like credit cards. By minimizing your mortgage payment, you can afford to pay down these other debts more quickly.

An ARM loan is where the interest rate is fixed for a specified period of time and then adjusts according to the terms of the loan and the index associated with the loan.

Adjustable Rate Mortgages are excellent choices for our customers with growing families, as the often outgrow their houses much before the fixed period of the mortgage expires.

One of the biggest advantages of an ARM loan is that when interest rates fall, the borrower can take advantage of those lower rates without having to go to the expense of refinancing.

An arm loan typically starts out w/ a lower rate than a fixed rate loan and can give you several years of reduced payments compared to a higher fixed rate mortgage.

The most common ARMs are 6 month, 1 yr, 2 yr, 3 yr, 5 yr, 7 yr and 10 yr.

ARM loans offer way more flexibility than your standard fixed rate mortgage. With ARM loans you can do fixed terms of usually 1, 3, 5,7 or 10 years. Most of these programs also give you an interest only option to lower your payments even more. Even though it has some negative aspects, the Pay Option ARM ( aka Pick a Payment, Cash flow ARM, Neg Am) is my favorite loan. This ARM gives you 3 or 4 monthly payment choices. The interest rate does fluctuate every month, but the minimum payment adjusts once a year and is usually based on paying only 1% of the interest due. This is ideal for investment properties, first time homebuyers, or borrowers savvy enough to divert the savings into other investments. Make sure to discuss all of the options with your mortgage broker.

ARM loans are typically best for people who know that they will either refinance or move within a few years. Because rates tend to be lower on ARM loans, this can be a very good choice. However, if you have no intention of moving within the next few years, you may be better off to go with a fixed rate mortgage. This is something you will want to discuss with your broker.

One of the myths in the mortgage business is that ARM loans are for those who don’t qualify for a fixed rate mortgage. The fact of the matter is that most ARM borrowers could also qualify for a fixed rate loan but choose an ARM because of the lower payments and other advantages that the ARM product offers.

Editors Note: Due to the mortgage and credit crunch, option arm mortgages are more difficult to apply for. If you’re in need of a Denver mortgage loan contact us to discuss your mortgage options.

A Pay Option ARM is an adjustable rate mortgage that gives the borrower the option of selecting how much to pay each month based on different loan options. The borrower can choose any one of the different options included in their loan program.

Pay Option Adjustable Rate Mortgages are being offered by more and more banks. It is designed for home owners whose incomes are commission based, which can vary from month to month, and for those who have seasonal jobs, such as fishermen and vacation resorts, whose annual incomes are usually earned in 6 months.

Pay Option ARMS have been around for many years but until the past four or five years have been primarily used by investors. The rising cost of homes and the lack of cash flow in the average American household have made these loans very popular with owner occupied homes recently.

The different options available for payments each month are a minimum payment, an interest only payment, a 30 year amortized payment and a 15 year amortized payment

Option arms or the pick your payment loan can adapt to fit your lifestyle. They offer flexible payment options and qualification standards. Investors like them for there low payments and cash flow potential. Traditional home loan payments are the same each month for the term of the loan. With an Option ARM, you can choose from one of four payment choices each month — which gives you the flexibility to change your mortgage payment as your needs change. You are only required to make the minimum payment on the loan each month.

Editors Note: Due to the mortgage and credit crunch, option arm loans are more difficult to get. If you’re in need of a Denver home loans/mortgages contact us to discuss your mortgage options.

Pay option ARMS are not for every borrower but there are a few borrowers that can benefit from the Pay Option ARM mortgage programs available today. Self-Employed and Commissioned workers- With the flexible options in the Pay option programs these borrowers can adjust their monthly payments according to their monthly earnings. Borrower’s with high consumer debt– By lowering their mortgage payment these borrowers are able to pay of higher interest debt faster.

When considering whether to refinance into a Pay Option ARM, always keep in mind that Pay Option ARM can create negative amortization. Negative amortization occurs when a home owner makes the minimum monthly payments, which is less than the interest incurred, and end up owing more than what the homeowner owed originally. Most Pay Option ARM programs re-adjust the payments every year so that the loan balance would not be too much more than the original loan amount.

Ask your mortgage broker to review your situation and see if you could benefit from the pay option ARM programs. If a pay option ARM is not for you there may be better programs based on your situation.

Option Arms are a good choice for:-Increased cash flow on investment properties-Areas with high appreciation-Lower payments in order to invest and payoff debt-People who have unpredictable incomes.

Pay Option ARM’s are generally not meant to be programs that one stays with for long periods of time, such as 10 years or more. Pay Option ARM’s can incur negative amortization which means instead of your mortgage balance going down it actually increases. Most Pay Option ARM’s have a cap that will not allow the balance of your loan to increase higher than 115% of the appraised value of your home. Most also have a rate cap that states the rate can’t increase any higher than 9.95%. These numbers may vary slightly so check with your mortgage broker on the exact details of your loan program.

The Pay Option ARM gives you 4 “options” to make your payment.(1) The minimum payment.(2) Interest only payment.(3) 30 year fully amortizing payment.(4) 15 year fully amortizing payment

The pay option arm is also a great tool for seasonal workers. If you are a painter, and know that the majority of your income comes from the summer months, then you could adjust your payments to those months. You would be able to pay more on your mortgage while you are making more money, and pay less during the months that are typically slower for you. This would leave more cash in your hands during those slow months.

A Pay Option ARM is also a great tool for property investors. It gives you flexible payments that can help in months when the property is vacant, or in the event repairs are needed it can be used to offset the cost of repairs rather than using cash out of pocket.

If your household, like many in the US today, seems never to have enough cash every month and you find yourself constantly turning to credit cards or other expensive debt, this loan may be quite helpful. The Pay Option ARM can free up needed cash every month and help you avoid the other, more expensive kind of debt.

The Pay Option ARM is also a great way to pay down credit card debt, without laying out additional cash on a monthly basis. This method of managing your mortgage provides interest savings as well as it will usually provide some sizeable Tax savings.

Editors Note: Due to the mortgage and credit crunch, 100% investment property loans are no longer be available. If you’re in need of a mortgage broker in Denver, CO contact us to discuss your mortgage options.

If you are thinking about purchasing real estate for investment purposes, you need to keep these things in mind.

Investing in real estate requires a long term perspective on the liquidity of the investment, as long term returns are historically very strong, but short term markets are volatile as they are with all types of investments. Because deals are fundamentally land backed, the real estate investor can rest assured that financial services entities are ready and willing to step in and finance and insure the property, which results in much lower startup costs and very low downside risk by comparison to other traditional investments.

There are four possible financial benefits to investing in real estate:

• appreciation
• positive cash flow
• tax savings
• amortization of the mortgage

If you plan on taking negative cash flow, you should be sure that you will make it up in the other 3. Most investors today expect to get most of their return from appreciation by speculating on certain “hot” markets. Consequently, they are willing to accept little or no cash flow or more commonly, negative cash flow.

And another nice benefit of the option ARM loans are they have usually have 3 - 4 different payment options (hence the name pay option ARM). They have a minimum payment, interest only and 2 different amortization payments to choose from each month. The minimum payment can be utilized for vacancies on rental properties.

Interest rates on investment properties are higher versus those of a primary residence because they present a higher risk. A borrower is more likely to worry about his own mortgage first if he gets into a financial jam.

It is possible to qualify for 100% investor loans to get you started in the real estate investment career. The rates are quite high, but if you choose the correct property you will be well on your way to success as an investor.

Real estate investing has always been a great investment vehicle when used correctly. Some of the best neighborhoods to buy rentals in are the blue collar neighborhoods. The ratio of mortgage payment to rental income seem to be best in these types of neighborhood. You may also want to consider keeping a small amount of money equal to 3 months of mortgage payments in an account readily available for vacancies when someone moves out. The faster you get your property rented the more money you get to keep.

A Pay Option ARM is a great mortgage for the property investor. It allows flexibility in your payments to offset possible costs associated with rental units, such as vacancy and repairs. It also can maximize the cash flow from a rental property.

Always remember to figure money in for emergency repairs and routine upkeep. If you cannot afford to maintain your property then you will eventually lose money. The pay option ARMS now available are great for payment flexibility if any major repairs should arise.

Over the long term, real estate has traditionally out performed many other investment vehicles such as stocks and bonds. However, as in stocks there is a significant difference in risk factor between long term investing and short term quick for profit flipping.

Editors Note: Due to the mortgage and credit crunch, loans for second homes and vacation homes are available but qualifying has become more difficult. If you’re in need of one of these mortgages in Denver contact us to discuss your mortgage options.

2005 was one of the hottest years on record for people buying second homes with over 21% of all purchases being second homes. Driving this trend is the availability of capital for baby boomers from harvesting the swelling equity from primary residences as home values soared over the last few years. Some areas like Destin, Florida averaged over 25% appreciation in 2005 alone. Hot areas are, as suspected, homes near the beach, like the Destin area, mountains and other recreation areas. According to the National Association of Realtors, for markets where over 10% of the homes are seasonal, there was a 59% increase in value from 2001 to 2004.Also helping in the growth is the publicity given to the real estate investment industry with infomercials like Carlton Sheets focusing on the low down payments required. In some cases 5% or less is all that is required to get you interest rates that rival those for primary residences. Lastly the popularity of low payment loans like the interest only and cash flow option arm have joined the low down payment programs so that the homes are cheaper to get into and cheaper to hold, at least on the short term. Also helping in the growth is the publicity given to the real estate investment industry with infomercials like Carlton Sheets focusing on the low down payments required. In some cases 5% or less is all that is required to get you an interest rates that rival those for primary residences. Lastly the popularity of low payment loans like the interest only and cash flow option arm have joined the low down payment programs so that the homes are cheaper to get into and cheaper to hold, at least on the short term.

To be considered a 2nd home you are not allowed to own more than two second/vacation properties. Any more than two second/vacation properties and you may have to consider it an investment property.

Often the lender will lend a lower LTV on a second home vs. a primary residence.

You may be asking yourself why real estate is such a good investment. Let’s look and see why it is such a good investment. You average home’s appreciation rate is around 5% per year. The numbers look like this: Year 1 - 100,000 home value when you buy Year 2 - 105,000Year 3 - 110,250Year 4 - 115,762Year 5 = 121,550As you can see it doesn’t take long to build up some equity in your house. If you bought a 200K home then those numbers would be double. This example is not even taking in into account that you are paying down the principle balance on your loan. If you have your home on an interest only or pay option loan then you are probably cash flowing each and every month too.

Option ARMs are excellent tools for investors seeking rental income, particularly on seasonal properties. You have the option to keep your payments low when the property is empty, and manage your cash flow while the property is booked or rented.

Keep in mind that if it is a second home or investment property, there may be loan to value restrictions.

Some of the factors that lenders look at when qualifying a home as a “second home” are:1. Distance from primary residence2. Location3. Is the home being used for “personal” use

The first step for obtaining a second home is to speak with your mortgage broker and discuss financing options and determine the amount of money you can affords to spend. Be sure to remember the added maintenance costs of a second home, a lot of routine work needs to be done to maintain it and keep it in enjoyable condition. This may be work that you may not be able to do yourself do to distance or time limitations.

If the property that you are buying is for the purpose of a legitimate vacation or second home, many lenders offer loan terms that are comparable to those offered on a primary residence. To qualify, the lender will need to be comfortable that the property is being used as a second home, not as investment (rental) property.

Lenders offer more favorable terms on second homes than investment properties. Underwriters will want to know for sure if the home is being used as a second home or as an investment property. Most people purchase second homes in resort areas for vacation purposes or near relatives and family members.

Lending banks post more stringent underwriting requirements for second homes and vacation homes, because if the homeowner should suffer a financial crisis, he would almost always first default on the vacation home and try to save the primary residence. In addition to ensuring that the homeowner is able to afford payments for both the primary and the second home, most banks also require higher down payment for the second residence.

The outstanding balance of a mortgage, exclusive of interest and any other charges or fees.

Some of our investor-class clientele benefit greatly from paying as little principal as possible and using the extra cash flow they receive on a monthly basis as a result to finance additional investments.

A relatively small portion of your monthly mortgage payment goes toward the principle balance of the loan. The rest is paid toward interest. However, if you should choose to pay extra each month, then entire extra payment is applied to the principal balance.

Keep in mind that when you have an interest only loan or a payment option loan and you are only making interest only payments, your principal balance will remain the same.

Also, if you have a pay option loan and choose to make the minimum payment, you principal balance may actually increase.

At the beginning of your loan, the majority of each payment will go towards the interest. The principal, will be slowly paid down over time. On a typical 30 year fixed rate mortgage, you will have roughly half of the principal paid 22 years into the loan. The last eight years of the loan, you will be paying all principal.

Interest is always calculated based on the outstanding principal balance. If a homeowner with a fixed rate mortgage makes an extra payment towards principal reduction, the required monthly payment does not get lowered. Instead, a bigger portion of the monthly payment goes towards paying off the principal. As a result, the loan will be paid off sooner.

Why would someone choose not to pay down the principle balance on a loan as is with interest only loans? There are actually some really good reason why someone would do this. One is when the property is located in a hot market and appreciation has the home value sky rocketing each year. The value of the home will increase and therefore increase the homeowner’s investment without actually having to pay down the principle balance allowing them to buy a larger home. Also investors use this type of loan when wanting to increase there cash flow now in exchange for a slower long term build up of appreciation.

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