• Recommended Links

Most consumers really don’t know much about the mortgage world. I know I didn’t before I got into the mortgage world. The extent of my knowledge was applying for a loan, getting hosed (e.g. fleeced) on fees at closing and then having to pay a mortgage payment every month. What I didn’t know was that my mortgage was never truly held by the company that I made payments to, they simply serviced my loan. Mortgages are packaged as mortgage backed securities and sold on the secondary market i.e. Wall Street.

Subprime mortgages or loans with less strict underwriting standards have followed the same process of selling their loans on the secondary market but with dismal results. Due to the multitude of delinquent payments and ultimate foreclosure on subprime loans, these loans are being rejected by Wall Street en masse. Several subprime lenders have already shut the doors: Mortgage Lenders Network, Ownit Mortgage, Sebring Capital with many more on the horizon. In other words, we’re headed for a sub prime meltdown of epic proportions.

What does this all mean for the consumer?

• Borrowers with questionable credit will find it harder to qualify for a mortgage.
• The number of borrowers looking to buy homes will probably be reduced substantially.
• If borrowers who have questionable credit can’t refinance, they may be facing foreclosure.
• People who can’t buy will continue to rent so rents may increase.
• Hard money lending will become the only option for many. Learn how to swim with sharks.
• Look for credit counseling/improvement to be heavily marketed. Desperate borrowers beware.

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

Here are some reasons why you would use a mortgage broker:

There are many reasons that you should use a mortgage broker and many advantages to using a mortgage broker. One reason to use a mortgage broker is because a mortgage broker has access to all kinds of different home loan programs.

A mortgage broker’s job is to assess your situation and then shop your loan via 100 different lenders in order to find you the most beneficial loan for your situation. We have access to over 1200 different loan programs and are able to obtain wholesale rates which can save you $100,000 plus over the life of your loan.

Here’s something to keep in mind. As a mortgage broker, I’m completely independent. I’m not employed by or work for any bank or lending institution. I work for my clients. The bank is going to look out for its best interests, isn’t it nice to have someone working for you, the borrower, and looking out for your best interests?

Many mortgage brokers have expertise in certain types of loans, such a construction-to-permanent loans, poor credit loans, or reverse mortgages. If your situation has special obstacles a mortgage broker may be the best answer.

A mortgage broker is an individual or firm that acts as an independent agent for both the borrower and the lender of a mortgage loan. Mortgage brokers are the middle man between you and the lending institution, which can be a bank, trust company, credit union, mortgage corporation, finance company or even an individual private investor. A mortgage broker will analyze your financial situation to determine which lender is the best fit for your loan needs.

Mortgage brokers have the advantage of being able to access dozens of rates quickly for similar loan programs from different lenders. Although banks have similar programs, their rates can vary widely. Mortgage brokers, through experience and through searching rates, can find which lenders are offering the lowest rates at any given moment.

Mortgage brokers have more options than banks. For example. if you have poor credit and need a sub-prime loan, your bank may have access to one option. A mortgage broker would have access to dozens. Other situations where mortgage brokers would be able to provide you with more options than a bank include manufactured homes, rural properties, commercial properties, first time home buyers, and special credit situations, such as bankruptcies and foreclosures.

Working with a mortgage broker has many benefits. Just to name a few: we discuss and explain the programs that are available to you in your particular situation. We inform you in writing that you loan interest rate is locked and wont change. We explain all the documents in plain English so you understand what you are signing. We explain all the costs involved in closing the loan. We give you a time-line of the loan process. We provide you with a good faith estimate. We also coordinate the final closing of your loan.

Mortgage brokers have access to wholesale rates, where as your local bank only has access to the rates that they offer. This can save you money on your monthly payment, especially if you have a unique situation that your bank will not be able to handle.

Mortgage brokers are also familiar with the area in which they operate. Using someone local has big advantages. With so much mortgage information online, it’s hard to know who to choose. If something goes wrong along the way with your loan, it is easier to deal with if you have a loan officer you can meet with face to face rather than a website or 800 number.

A mortgage broker is also able to move your file to another lender should a better deal appear. Or if there is a problem with your file in underwriting your mortgage broker can switch lenders within minutes and ensure you meet your close date. Local banks cannot do this.

There are many reasons why you should employ the services of a professional, licensed mortgage broker when you are ready for your next home loan. Probably the biggest reason is that they are on your side. If you go directly to a bank to get a home loan, the banks loan person has only the banks interest in mind, not yours. Another reason is that mortgage brokers are contracted with banks and lenders at wholesale prices, which mean you can get a better rate. For example, if you had the option of buying a new BMW from either the BMW dealer for full price, or from BMWs wholesaler that gets the cars directly from the plant at a huge discount, which would you choose? Most people like to save money and when you work with a mortgage broker, you are likely to get a better rate.

Mortgage Brokers work to find the best loan program for your specific situation matching you with the loan program that fits best. Having access to hundreds even thousands of loan programs means that your broker will find the best program for your personal needs.

What’s the difference between a mortgage broker and a lender? A mortgage broker counsels you on the loans available from different wholesalers, takes your application, and usually processes the loan which involves putting together the complete file of information about your transaction including the credit report, appraisal, verification of your employment and assets, and so on. When the file is complete, but sometimes sooner, the lender “underwrites” the loan which means deciding whether or not you are an acceptable risk.- Back to Top -Will I save money going directly to a mortgage lender? Not necessarily. In fact, if you are a reasonably astute shopper, you will probably do better dealing with a mortgage broker. Mortgage brokers do not add any net cost to the lending process, because they perform functions that would otherwise have to be done by employees of the lender. Furthermore, because mortgage brokers deal with multiple lenders — in a typical case, 25 to 30, sometimes more — they can shop for the best terms available on any given day. In addition, they can find the lenders who specialize in various market niches that many other lenders avoid, such as loans to applicants with poor credit ratings, loans to borrowers who do not intend to occupy the property, loans with minimal or no down payment, and so on.

The best reason of all, the Mortgage Broker works for you. He doesn’t work for the bank or any lender, but for you. His primary goal is to fit you into a product that is right for you, process the loan as quickly as possible, fund the loan in a timely manner. Another satisfied client and hopefully many referrals

Another reason to work with a Mortgage Broker is that you will have access to hundreds of loan programs instead of the small number offered by a specific lender. Mortgage Brokers also are more likely to help borrowers with poor credit, hard to prove income, or financing for unique situations.

Brokers make banks compete for your business

By having the ability to switch lenders at any time A mortgage broker can also deal with any problems that may arise much more efficiently then a bank.

Mortgage brokers have hundreds of loan products available to them, where as your local bank may have only a handful of loan programs. This means that credit, income, and other factors are not as important when it comes to getting you approved. The mortgage brokers job is to take a completed loan application and present it to various lenders, to find you the best possible rate and program that fits your needs.

Mortgage Brokers are compensated only if the mortgage loan closes. For this reason, mortgage brokers have an interest to see to it that the home buyer’s purchase proceeds quickly and smoothly.

Before lenders lend money, they need to be assured that the funds will be repaid. In other words, is the prospective borrower creditworthy? To find out, they ask for various types of information.

Sub-prime lenders understand you may have come upon some hard times in the past and will look at your more recent credit history.

Lenders look at the risk that you will default on the loan, based on several factors. Those include credit score, history of paying your mortgage or rent on time, debt-to-income ratio, occupancy type (primary residence, second home or investment property), property type (single-family, 2-unit, condo), percentage of the property’s value you want to borrow (60%, 70% 80% 100%), and work history, among others.

Lenders will look at an applicants past credit history, income and the value of collateral being used to secure the mortgage. The lenders will compare this information to their guidelines to determine if the applicant is a good credit risk.

With regards to repayment capability, most banks prefer that a borrower has total debt obligations of less than 45% of gross income. Total debt include any monthly obligations the borrower has, including the proposed mortgage payment, property tax, homeowner insurance, automobile financing, credit card installments, alimony, etc. Utility and food costs are not considered debts and are not included in the Debt-to-Income ratio. Some non-prime mortgage lenders allow a Debt-to-Income ratio of up to 55%.

Lenders will look for job stability, credit worthiness, disposable income, liquid assets, debt to income ratios and loan to value ratios among many other things. Sometimes a borrower can be deficient or weak in one of the above mentioned areas but make up for it in others to still be considered for the financing desired. Lenders don’t typically want to see a lot of job changing or career changing happening. Also, obviously the better the credit the better the chance the lender will be repaid on the debt. Disposable income is how much income is left over after you have paid all of your monthly obligations. Debt to income is a ratio that is calculated based off of how much you make divided by how much your obligations are and LTV (loan to value is simply how much of a mortgage you are borrowing compared to how much your home is valued at. These are all very important items that a lender looks at as a part of your whole package.

Reserves is another factor that lenders want to see. Reserves are simply how much liquid cash you have in the bank to make payments with. If you are a first time home buyer the reserves can be anywhere from 2 -6 months worth of PITI (Principle, Interest, Taxes and Insurance). Various lenders will have different guidelines so be sure to ask your Mortgage Professional how much cash you will need to have in reserves.

Your credit worthiness will affect the interest rate and the number of programs that are available to you.

You may be offered a lower rate if you choose to take a pre-payment on your mortgage loan. Companies will have a couple options as far as the pre-payment penalty in which you can choose from. The most common being a hard pre-payment penalty which will require you to pay a certain amount of money if you pay your mortgage off in a set period of time. A soft pre-payment penalty usually allows you to sell your loan during the pre-payment term and not have to pay a penalty. There are many different pre-payment penalty set-ups in regards to them being hard and soft, with some being a combination of the two.

Lenders that have pre-payment penalty features on their loans generally do not like to have their pre-payment penalties bought out. The number one reason for taking a considerably higher rate to avoid a pre-payment penalty is because you are planning to sell the house quickly or refinance to a new loan quickly. Lenders prefer for you to stay in your mortgage with them for long periods of time so that they can earn more money. By applying prepayment penalties to loans, the lenders can keep their borrowers for longer periods of time on average. Some people will still sell or refinance again before their prepayment penalty period is up, however the lender will make their money then from the prepayment penalty.

If you plan on moving or refinancing before the prepayment penalty expires, it’s a good idea to avoid getting one. The advantage to a prepayment penalty is that you will receive a lower interest rate. If you don’t plan on moving or refinancing, it may be in your best interest to consider having a prepayment penalty on your mortgage.

Make sure you ask and are completely aware of any pre-payment penalties on your loan before you get to closing. If you are choosing to go ahead with an adjustable rate mortgage (ARM) you should make sure that your pre-payment penalty does not exceed your fixed rate portion or your loan. An example would be if you choose a 2/28 ARM (rate is fixed for 2 years and then adjusts every year thereafter for the next 28 years) you probably do not want to have a 3, 4, or 5 year pre-payment penalty on your loan. Many times after your fixed portion of your ARM is up you will choose to refinance to either another ARM loan or a fixed rate loan and you don’t want to get stuck still having a pre-payment penalty.

If you are taking an adjustable rate mortgage (ARM) with a prepayment penalty make sure that the penalty is not longer than the fixed period of the ARM because some arms may go up between 5 and 6% after the initial adjustment and at that point it would be in your best interest to be able to refinance without penalty after the initial fixed period.

Other sites: Mortgage Broker | MIP | 1003 The Loan Application | Closing Costs| Pay Option Arm Calculator

Payment of the mortgage loan before the scheduled due date; may be Subject to a prepayment penalty.

If you plan to stay in your home for more than 3 years, for example, you might be able to get a slightly lower interest rate if you agree to take a 3 year pre-payment penalty. As long as you don’t move or refinance for 3 years, you will save money with the lower interest rate. If you have to move within the first 3 years due to an unforeseen emergency, you will have to pay the pre-pay penalty. It will be based on the amount of time left in the penalty period.

A Hard prepayment penalty means that you will incur a penalty for paying off your mortgage early regardless of whether you are selling your home or refinancing.

In most cases, you can take a minimal hit to your rate for a shorter or no prepayment penalty.

A Soft prepayment penalty will allow you to sell your home without incurring a penalty for paying off your mortgage early. If you were to refinance within the prepayment period with a soft prepayment, you would incur a prepayment penalty.

A pre payment penalty is usually six months of your mortgage payment

Some states do not allow Pre-Payment Penalties, or have modified penalties. The only exemption to this, would be from a Federally Chartered Bank.

You should check if your loan has a prepayment penalty by reviewing the federal truth-in-lending disclosure you will receive from the lender when your loan application is submitted.

When purchasing a home you intend to live in for a long period of time always take a prepayment penalty. If you keep the loan in place for 10 years or better you will save thousands over the life of the loan.

Usually the term on a prepayment term is anywhere from 6 months to 5 years.

Some states limit the application of pre-payment penalties by local or regional lenders, however national lenders will often be able to offer a loan with a prepayment penalty even in these states, and often a lower rate and or payment as a result.

Editors Note: Despite to the mortgage and credit crunch, No Closing Cost Mortgages are still available. If you’re in need of a Denver Colorado Mortgage contact us to discuss your mortgage options.

Many brokers offer a no closing cost option in exchange for a slightly higher interest rate over the life of the loan.

If you currently have a fixed-rate loan and can refinance at “No-Cost,” meaning you can obtain a lower rate with no out-of-pocket fees, it only makes sense that you should refinance. If you can take your 30-year fixed rate mortgage and leave the balance where it is and lower the interest rate, thus lowering the monthly payment, why in the World would you not do it? And even if you are several years into your current loan, a No Cost Refi may still save you money. If for example, you are starting year 5 of your loan, the refinance can amortize your loan over 25 years instead of 30. Doing it this way, you are not starting all over again. You would be paying off the loan in the same amount of time. A No Cost Refi could you save you thousands of dollars in interest over the life of the loan.

For homeowners refinancing for lower monthly payments, No Closing Cost mortgages may work out better even though No Closing Cost loans are at a higher interest rate. If a homeowner can save $300 per month by refinancing, even if he intents to sell the house in two years, he would save $7,200 during the two years. Of course he should make certain the new loan does not add to the old loan balance by more than $7,200. Without taking into consideration the time value of money, saving $7,200 over two years only to pay it back in the form of a higher loan balance when he sells the house does not benefit the homeowner.

No Closing Cost Mortgages should not be confused with No Money Down mortgages, which while also being more expensive in the long run, are for buyers who do not want to contribute a lump sum payment toward the price of their new home.

Borrowers elect “no-cost” loans for two reasons. They are either short of cash, or they don’t expect to have the mortgage very long. Borrowers in the second group minimize their upfront costs because they expect to pay the high rate for only a short period.

No Closing Cost Mortgages can help people short on cash obtain a mortgage with no out of pocket expenses. However, borrowers should understand no closing costs mortgages will cost them more in the long run depending upon how long they keep the mortgage. Lenders offset closing costs by charging borrowers a higher interest rate. This higher rate adds tens of thousands of dollars to a 30 year loan kept the entire 30 Years. Which, when compared to $4000 closing costs estimated on a $100000 Loan should make borrowers think hard about using a No Closing Cost Mortgage.

It makes sense to look at refinancing 6 months after obtaining a no closing cost loan. If your home now has a decent amount of equity, you may be able to obtain a lower interest rate due to a positive change in your loan to value ratio.

Many borrowers confuse a “No Cost” loan with a “No Out of pocket Cost” loan. In almost all refinances the closing costs can and are rolled into the new loan amount. This means that the borrower doesn’t have to pay for the closing costs with their own funds. A true “No Cost” loan most or all of the closing costs are waived in exchange for a higher interest rate.

Usually, the “no-cost” option is beneficial for first time homebuyers who may not have enough saved up to warrant paying the closing costs. It should be made very clear as to what options are available and the differences between a “no-cost” and other loans should be very clear.

Many potential borrowers mistakenly think that lenders who advertise “no cost, no fee” loans are actually waiving the costs and fees. The truth of the matter is that the borrower will still pay for these items in the form of a higher rate of interest.

Editors Note: Due to the mortgage and credit crunch, investment property loans may be harder to obtain. If you’re in need of a Denver, Colorado Mortgage contact us to discuss your mortgage options.

Acquiring investment properties has become much more simplified in regards to the financing options available. Today’s mortgage programs can allow you up to 100% financing of your investment property. There are several different loan options available that are set up to maximize your cash flow.

Loans for investment properties are generally much more risky than owner occupied homes. To offset this risk the lender may require a higher down payment and a slightly higher interest rate. Also, if the investment property will be income producing then the lender will restrict how much of this income can be used towards loan qualification. Ask your preferred mortgage professional about the implications of buying an investment property with a mortgage.

Investment loans are so flexible they are allowing many investors to get into the game. It is a good idea to speak to your Mortgage Broker to see how we can get you an investment loan also!

The flexibility of a pay option ARM is also a useful tool to investment property owners. Several of my borrowers us this loan not to increase cash flow, but to maximize the use of the rental income. While the property is rented they make the highest payment they can with just the rent, when the property is vacant between renters they utilize the minimum payment so there out of pocket expense is minimized. Investment property owners can also utilize the minimum payments if repairs are needed, etc. The minimum payment can off set the out of pocket expense of repairs and maintenance

Although it may seem like easy money, making money in real estate investing is a skill that takes research and experience to acquire. It requires a good plan and an understanding of the processes involved to either rehab a home or renting to tenants. Make sure you do your research and understand what you are undertaking. The last thing you want to do is put yourself into a situation where the property you buy costs you money every month.

In the world of real estate investing, a property that generates monthly cash inflow is always considered a sound investment. To create a positive cash flow situation, investors often prefer “interest only” mortgage products, which requires the homeowner to make monthly payments on only the interest accrued for the prior month. Because “interest only” payments are always lower than fully amortized payments, investors have a better chance of creating a monthly cash inflow.

If you are purchasing a home that is in a state of disrepair, you may want to look at a renovation or rehabilitation loan. Lenders will loan on investment properties up to 90% of the after repaired value. Monies are given out on a draw schedule similar to a construction loan. Investors find these types of loans favorable due to not having to pay for repairs and remodeling out of pocket.

A Pay Option ARM and an interest only loan are great choices for mortgages on your investment properties. These will allow you to have the lowest payments possible to help you utilize your cash flow to its fullest potential. There are many more loan programs now for investment properties than there were a while back. You will generally pay a somewhat higher rate on an investment property than you would on an owner occupied property due to the higher risk involved to the lender.

Editors Note: Due to the mortgage and credit crunch, Interest Only Mortgages may be harder to obtain. If you’re in need of a Denver, CO Mortgage contact us to discuss your mortgage options.

An interest only mortgage is a mortgage were the borrower(s) pay only the interest payments on the loan. Generally the term of an interest only mortgage is over 30 years with the interest only period either 5 or 10 years and then the loan will re-amortize into a principle and interest loan for the remaining 20 or 25 years.

Interest Only mortgages are a great way to increase your cash flow. Often it is smartest to instead of throwing money at the mortgage to instead take an Interest Only mortgage. This will allow you more money each month to pay off other high interest rate debt.

You should weigh your options when considering an interest only loan. Don’t hesitate to contact me to discuss your unique situation.

With most interest-only payment option loans, you can always pay extra towards the principal you owe at any time. When times are flush, pay down that principal. When times are tough, pay only the interest-only payment. You decide.

In areas with high appreciation such as 10% - 20% per year it’s not necessary for a person to pay down the principle on a mortgage to reap great profits in an investment property. This is where many people use I/O loans along with Neg-Am products.

Often times lower income borrowers or first-time homebuyers will apply for an interest only mortgage. This helps reduce their monthly mortgage cost while still being able to get into a home. Investors buying investment/rental properties will apply for interest only loans reduce monthly debt on their properties while increasing their cash flow from the rental payments.

The easiest way to figure the payments on an interest only mortgage is; loan amount x interest rate percentage / 12. An example of the payments on a $150,000.00 mortgage with a 7.50% rate would be;150,000 x 7.50% = 11250 / 12 = 937.50

Interest only payments will not reduce the principal balance of your mortgage.

When dealing with smaller loan amounts be sure to compare actual monthly payments of a fully amortized and an interest only loan. Most of the time anything under $100K the difference is extremely minimal. This is Due to the fact that interest only rates are higher than your fully amortized rates.

Another advantage of the interest only mortgage is that most lenders allow the borrower to qualify at the interest only payment. Since this payment is lower than a fully amortized payment, the result is that the borrower can qualify for a larger mortgage, usually meaning a better or bigger house.

Many people will get interest only loans to help relieve them of the financial burdens of all of their monthly bills. Obtaining an interest only loan can save you a considerable amount of money in your mortgage payment. While you are not paying down the principal on your loan amount your house is still appreciating therefore helping you to still build equity. Some people that obtain interest only loans will also use their income tax refunds to apply towards the principal of their loan each year. This way they still have the flexibility of a super low mortgage payment all year long and they still pay down the principal of their loan just as much, if not more than they would on a normal 30 year mortgage loan.

Interest Only loans are often utilized by those who expect their income to increase in the near future. College students who are expecting to graduate and professionals getting an advance degree can purchase the homes now which they otherwise cannot afford with their current incomes.

Having an interest only loan helps you to keep your monthly payments low. Although you do not reduce the principle balance of the loan, your house will appreciate over time, thereby building equity.

Other sites: Loan Officer | FSBO | AZ Mortgage Source | How to choose an ARM Loan | VA | Conforming Loans | Why should I refinance | Delinquency | MIP | Fixed-rate mortgage | 1003 The Loan Application| Pay Option Arm Calculator

Next Page →

• Denver Lender LLC

  We are a mortgage company located in Denver, Colorado. Click here to compare mortgage rates.
  

• Search for:

• Tags

  adjustable rate mortgage appraisal colorado commercial compare consolidation construction conventional credit score debt denver fha first mortgage first time home buyer fixed rate mortgage foreclosure home equity home equity loan home loan investing jumbo lending loan amount meltdown mortgage mortgage backed securities negative amortization prepayment prime property purchase rate rate increase real estate refinance reverse mortgage second mortgage shopping stated income Subprime va value

• Recent Posts

  • No Country for Mortgage Brokers
  • File under…
  • Monday Morning Quarterback
  • Keeping up with…
  • Video: The Subprime Meltdown of 2007
  • Pavilions, Argonaut, and more
  • Why don’t we save?
  • Spanning the web
  • Mad World
  • What will 2008 bring…

• Legal

  The content provided on this website is presented for informational purposes only. The information provided on this website should not be construed as offering legal, financial or other advice to be relied on by the reader to make or refrain from making any decision or to take any action. The investment, mortgage or financial services or strategies mentioned in and throughout this website may not be suitable for you.