What is a Balloon Mortgage?

A Balloon Mortgage is a mortgage that has a payment term of five to seven years with a payment amount based on thirty years. At the end of the five to seven year period the remaining balance of the mortgage (the balloon) is due. This creates additional risk to the borrower because they must pay the remaining balance on the mortgage, refinance, sell the home, convert to a traditional mortgage at market based interest rates, or foreclose on the home all together. This is referred to as "rollover" risk and can be a major problem if an additional loan can't be acquired to pay off the balloon or the property can't be sold. As a result, the borrower may face bankruptcy even though the property is worth more than is owed on it. That is because the borrower was expecting liquid assets (cash) at the point the mortgage matured.

The advantage of a Balloon Mortgage is cheaper interest rates and easier qualification hurdles than a traditional 30-year Fixed Rate Mortgage. This is a good idea for a savvy homebuyer that may not be able to qualify for traditional mortgages but anticipates being able to refinance or sell the property within the five to seven year period. Choosing a Balloon Mortgage in this situation gives the borrower enough time to increase income, obtain another mortgage, or build equity and sell the home at the end of the seven period.

Another option that is common with Balloon Mortgages is a two-step mortgage, or a Balloon Mortgage with a reset option. The reset option "resets" the Balloon Mortgage into a more common mortgage type at current interest rates and matures in the typical thirty years after the Balloon period is over. This reduces the refinance risk incurred by the borrower and makes it a more viable option.

ARM Crisis - How'd We Get Into This Mess?

"It's all fun and games until someone loses an eye." That's what our mothers used to say when we played rough as children. In this case it's all fun and games until someone loses a house. In the last two or three years the U.S. housing market has experienced a considerable amount of disappointment (some may say crisis). It all started with soaring house prices in Michigan, California, Nevada, Florida and Arizona. Eager investors, professional and amateur, wanted to ride the wave anticipating the prices to continue soaring. Mortgage lenders eager to get in on the business began offering option ARMs that allowed practically anyone to buy a house they couldn't afford. These Adjustable Rate Mortgages came tied with agreements that allowed the interest rates to climb as much as 6% by the first adjustment period!

The unsuspecting homebuyer (or eager fool) was faced with a house payment that just about doubled in the wake of rising interest rates. Instead of a manageable 5 or 6% many homebuyers were faced with 10% on homes that were out of their price range to begin with! The, now astronomical, interest rates forced buyers out of the market and, in turn, dropped house prices. So not only can homebuyers not afford their mortgage they can't afford to sell either because their home isn't even worth what they initially paid for it.

Next comes foreclosure. Mortgage lenders began pulling these overpriced money traps out from under people and became stuck with them themselves. Consequently, investor confidence in mortgage backed securities declined and interest rates continued to climb as a result. In addition (if that wasn't problem enough) mortgage lenders could no longer raise funds to lend and couldn't collect payment on outstanding loans. This caused 177 top lenders to shut their doors since February.

To add to all this the subprime market pretty much shut down leaving low income and hurt credit buyers out in the cold. Simple economics shows that when demand decreases supply increases. Thus, the housing market is now flooded with houses that can't sell and the lending market can't open its doors to would be buyers.

As a lesson, homebuyers need to be educated on mortgage products before they decide to buy a home. Knowing what options are out there and selecting the right one is critical. Websites like Mortgage Super Search.com provide a wealth of information and mortgage calculators that allow prospective homebuyers to do adequate research before they are ready to sign on the dotted line.

Second Mortgage - What You Should Watch Out For

What is a Second Mortgage

A second mortgage is a mortgage taken out in addition to the first mortgage on a home. In many ways it is similar to a home equity loan because the second mortgage is secured using the home's equity. From a lender's perspective a second mortgage is more risky than a first mortgage because in the event of a default (foreclosure, bankruptcy, etc.) the first mortgage must be completely paid off before the second mortgage can receive any payments. Thus, the interest rates for second mortgages are higher than the interest rates on a first mortgage.

Similar to a first mortgage, a second mortgage can have a fixed interest rate or an adjustable interest rate. It's important to determine what your financial objectives are before commiting to a specific mortgage type. Think about what it is the funds from your second mortgage will go towards? Are you improving your home to increase its value? Or are you going to use the funds to go on vacation or fund college expenses?

Mortgage Purchase or Refinance

Costs to Watch Out for with a Second Mortgage

Just like a first mortgage, second mortgages have several costs associated with them (sometimes more). These can include appraisal fees, points, application costs, closing costs and title searches. Appraisal fees, application costs and title searches are usually pretty standard. The ones you'll want to watch carefully are points and closing costs. These are fees that a lender will charge for writing your mortgage. It's obvious that a lender wants to make the most money possible so it's a good idea to compare these fees with other lenders and negotiate them as much as possible.

Mortgage Payment Calculator: Figure out your estimated payment for different loan amounts, interest rates, and terms

Other Things to Watch out for with a Second Mortgage

There are an additional number of facets regarding second mortgages that should be taken into consideration before signing on the dotted line. These include the APR, default penalties, prepayment penalties and balloon payments. This is where speaking to several different lenders comes in handy. Try speaking to a loan officer from a brokerage, bank and credit union. This should help to gain a good perspective on what is happening in the market in terms of interest rates. Default penalties, prepayment penalties and balloon payments should be avoided at all costs. Default penalties act much like those associated with credit cards. Your interest rate rises and your payment follows suit. Prepayment penalties can be a terrible thing if you need to refinance or plan on selling the home. This guarantees that the lender will make money even if the mortgage is paid early but does absolutely nothing for the borrower. Lenders also try to entice borrowers with an exceptionally low payment and cover over the fact that there's a balloon payment at the end of the loan. This is large, lump sum payment that must be paid all at once. Unless you plan on having this lump sum this should also be avoided at all costs.

Home Equity Loans

Reverse Mortgage - Right for You?

A reverse mortgage is a mortgage product designed for those over 62 years old. It's called a "reverse" mortgage because instead of making payments to the bank to build equity in your home the bank pays you, thereby reducing the equity that has built up in your home. This mortgage product tends to be used by those who are committed or plan on staying in their home, need additional income and have no other assets, own their home outright or have only a small first mortgage and don't plan on leaving their home to their heirs. Reverse mortgages definitely aren't for everyone so continue reading to see if it's right for you.

Potential Reverse Mortgage Drawbacks

Just like all other mortgage products there are potential pitfalls. Being aware of them before closing on a reverse mortgage will help prepare you for what is to come. First, the proceeds from a reverse mortgage could effect eligibility for supplemental social security income and medicaid benefits. Since regular social security and medicare benefits aren't based on income and assets these are unaffected. Reverse mortgages (like all other mortgages) have costs and fees associated with them. This could make a reverse mortgage an expensive finance tool. If other assets are available (retirement accounts, stocks, bonds, etc.) it's better to use those first. Lastly, a reverse mortgage reduces the equity in your home. It can't be reduced to more than the home's fair market value but it could reduce what is available to your heirs as inheritance. If any of these drawbacks seem like a potential problem down the road it would be wise to reconsider the decision to apply for a reverse mortgage.

Typical Requirements

Since there are all kinds of reverse mortgage products offered by all kinds of lenders and government programs there are different standards that need to be met in order to qualify. Generally, the youngest borrower must be over 62 years old by the time the reverse mortgage closes. Next, the home can't be a mobile home or co-op apartment and it must be the principal residence of the borrower (more than half the year must be spent at this residence). Lastly, the home must meet minimum FHA property standards and the remaining mortgage on the home must be paid off either before the reverse mortgage closes or using the reverse mortgage proceeds.

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Renting Vs. Owning - Who Should Do What?

You've probably heard it a million times: "You should buy a house." The reasons include: "It's a smart investment," "It's a tax shield," and many more. The fact of the matter is that there are many hidden costs associated with home ownership that many people fail to recognize. And home ownership, like any investment, has its risks. Unlike investments in stocks, bonds or mutual funds people tend to sweep the associated risks under the rugs and, potentially, end up in bad situation.

For the first five years of home ownership most of the mortgage payment is applied towards interest. In fact, approximately 80% of a fully amortizing mortgage payment is interest for the first five years. Add in yearly maintennace costs (1-2% of home value), property taxes and homeowner's insurance and there's a high probability that you're either losing money or breaking even with what would have gone towards rent. Someone considering purchasing a home should consider the probability of moving within five years, the costs associated with moving and the costs associated with owning the home.

Many prospective home buyers are lured in by low interest rates. "I have to buy now while the interest rates are at all time lows!" is often the argument. Unfortunately, many other people have the same idea. This forces a lot of buyers into the market, thereby creating a seller's market and rapidly inflating house prices. When the rates increase again (and they will) buyers will exit the market and house prices will drop. This will decrease the value of the house that you paid a premium for. Now you're holding onto an investment that is worth less than what you owe for it.

Lifestyle is another thing to consider when deciding whether to rent or buy. Apartment or condo complexes often feature amenities like pools, gyms, etc. These types of buildings are also usually conveniently located to places of employment, attractions, night life and shopping centers. On the other hand, to have the same amenities in a single family home the costs would be astronomical. Social activities is another aspect of lifestyle that is associated with the decision to rent or buy. With apartment life there is typically more social activities available since single family homes tend to be in more suburban or rural areas.

In conclusion, renting tends to be the better choice for those that have a high probability of moving within five years like recent graduates or professionals that tend to transfer and single parents who don't have time for maintennance or money to purchase a home a in a desirable school district. Renting also tends to be the better choice for retirees who want reduced responsibility and more available capital. All in all, owning a home can be a good investment but one must weigh out all of the costs and benefits in order to make a more informed decision.

Mortgage Advice for a Sluggish Housing Market

Housing markets tend to slump from time to time. When this occurs the power is usually in the hands of the buyer and it's important to know some tricks that could save lots of money on your mortgage (or even get your house sold).

The first thing to be aware of is mortgage buydowns. A mortgage buydown is where a portion of the interest is paid in advance in order to lower the monthly period for a specific amount of time. A typical mortgage buydown is a 3-2-1. This is where the interest rate is bought down 3 points and increases one point every year until it reaches its fixed rate.

Now that you know what a mortgage buydown is it's time to make it work in your favor. In a slow housing market sellers can be convinced to buydown a buyers mortgage for purchasing the home. The seller benefits because the home is sold and the buyer benefits because their payment is lowered for the first three years.

The next thing to keep in mind is the FHA (Federal Housing Administration). The FHA was created to speed up slow housing markets during The Great Depression. Whenever home sales stall the FHA loosens its requirements on the mortgages it will insure (they don't actually lend money). In turn, this eliminates default risk on the lender's end and allows them to loosen their requirements as well. If you didn't think you qualified for a mortgage during a slow housing market, you might want to think again.

FHA Express-The quick way to get an FHA loan!

Win at the "Condo" Game

Ever think of the difference between renting an apartment for five years and owning a condo for the same? And what's the difference between an interest only mortgage and a 30 year fixed rate mortgage? This blog takes a look at just that and uncovers the best route to apartment life.

Let's start with the average price for a U.S. condo in 2007: $215,000. For purposes of this blog we're going to compare a traditional 30 year fixed rate mortgage with a 5/1 interest only mortgage at the published interest rates as of the writing of this blog. We're also going to assume a period of 5 years to hold the property (this is when the payment would increase using a 5/1 interest only mortgage).

30-year fixed rate mortgage: 5.94
5/1 interest only mortgage: 5.72

1) Using a mortgage calculator (the one at mortgage super search compares both mortgage types) we find out that the payments on our condo are as follows:

30-year fixed rate mortgage: $1,280.75
5/1 interest only mortgage: $1,024.83

2)Calculate the savings per month by taking the 5/1 interest only mortgage and the amount that can be made in risk free interest (5%) over the five year period:

Savings: $255.92 per month
Investment: $17,404.12

3) Compare the amount of equity you would accrue on the 30 year fixed rate mortgage (using the amortization table from the interest only calculator) to the amount you made from investing the savings over the same time period. Note: This assumes that the property is sold for no gain and doesn't take any fees, taxes, etc. into account.

Equity on a 30-year fixed rate mortgage: $18,672.67
Invested savings upon maturity: $17,404.12

4)At this point it looks as though the 30-year fixed rate loan is the better option. However, we didn't take into account the amount of money that was paid out during this time frame. If we take this number (from each mortgage) and subtract it from its respective gain (equity or investment) then we get our total living cost for the five year period.

30-year fixed rate mortgage: $76,845-18,672.67= $58,172.33
5/1 interest only mortgage: $61,489.80-17,404.12= $44,085.68

As you can see here, our living expenses (rent) over a five year period for a 30-year fixed rate mortgage is $58,172.33 and for a 5/1 interest only mortgage is $44,085.68. Although on the surface the 30-year fixed rate mortgage looks like the better option, mathematically the interest only mortgage is the better of the two.

5) In addition, let's take a look at what each one would look like in terms of rent. Another thing to keep in mind is the tax shield provided by mortgage interest. That's something that renters can't benefit from.

30-year fixed rate mortgage: $58,172.33/60= $969.54
5/1 interest only mortgage: $44,085.68/60= $734.76

As you can see purchasing a 1,056 sq. ft. condo with an interest only mortgage and holding it for five years (AND investing the monthly difference at a 5% return) ends up making your monthly living expense $734.76. Keep in mind that that is with no property appreciation. Should the property appreciate there is even more of a gain and makes this number either less of an expense or a profit!