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.

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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.

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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.

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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!

Mortgages for Real Estate Investments

For years people have been investing in real estate, building a healthy net worth, funding retirement and much more. One of the greatest features of real estate investment is that anyone can do it with the proper knowledge. When investing in real estate it's essential to know the type of investment you're interested in, the time period of that investment, risks associated with the investment and your financial situation (now and throughout the investment period).

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Types of Real Estate Investments

There are many types of real estate investments. For purposes of this article we'll focus on purchasing a property. In that respect there are investments that involve purchasing real estate for rental income and purchasing real estate for resale. Rental properties are less risk intensive because they return a cash flow during the investment period while also retaining (and most likely appreciating) their value. A real estate investment geared towards resale (suchas a flip) involves slightly more risk because of the speculation in value. Think of the real estate investment period like a stock or bond. A resale is more like a stock because its value is being speculated. Rental property, on the other hand, is closer to a bond because it pays back over time. Another thing to keep in mind is relationship between risk and reward. The higher the risk, the higher the potential reward. Buying a bond may be a little safer but stocks are better known quick returns (and large returns at that). The type of real estate investment you choose should coincide with the level of risk you are comfortable with.

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Real Estate Investment Period

We've already compared the two major types of real estate investments. When considering the amount of time to invest there are several factors to consider. Are you looking to invest aggressively in a short period of time (buy more properties to build an investment portfolio) or fund a life event (retirement, child's college education, etc.)? It's important to understand your reason for investing. This will help determine your level of risk and, in turn, dictate the type of investment and the length of the investment. For aggressive investors who are less worried about risk and want to establish a wealth building portfolio it's better to target a shorter investment horizon. This is because you can secure more favorable mortgage types (which will be discussed later). For investors saving for retirement or other life event, slow and steady wins the race. Target an investment period that coincides with the type of life you'd like to be living during the harvest period of your investment. For example, if you'd like to retire at 60 and you purchase your investment property at 40, your investment period is 20 years. Your investment and mortgage types will coincide with this.

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Know Your Financial Situation Before Investing in Real Estate

Regardless of your investment type or invesment period, you are going to want to have an impressive credit rating (low debt utilization ratio, no or few late payments, etc.) and an adequate income. With rental properties rental income is usually accepted for any unit you're not living in. Before purchasing a property check your credit score as well as lenders' requirements for top rates. Often, a couple points on your credit score can save on points in interest (resulting in thousands of dollars of savings over time). The amount you put down and the case reserves you have for maintennance and improvements will play a big role in your investment as well. With rental properties the ideal situation would be to put 20% as a down payment. This will help negotiate the best possible rates and eliminate the need for private mortgage insurance (resulting in huge savings over time). With resales the goal is to put down as little as possible. It's more important to retain cash for necessary improvements the increase the value of the property. Also, since the investment time period is short you're not planning on paying a lot in interest or private mortgage insurance anyways.

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Mortgage Types for Investing in Real Estate

Depending on the type of real estate investment you'd like to be involved with and the time period for investing, there are several mortgage types to consider. For an investment in rental real estate that has a long investment horizon you'll want to stick with traditional mortgage types or FHA insured mortgages. These include:

• 15 Year Fixed Rate Mortgages
  
• 30 Year Fixed Rate Mortgages


• Balloon Mortgages


• Graduated Payment Mortgages


• Buy Down Mortgages

Investments in resale real estate that have a shorter investment period are better suited for mortgages that require little to no down payments, have a low introductory interest rate and require that little to no principal be paid. This type of mortgage includes:

• Interest Only Mortgages


• Option ARMs


• Convertible ARMs

(For further information on these mortgage types visit http://mortgagesupersearch.com/index.php.)

A good rule of thumb in determining the right type of mortgage for your investment is the longer the investment period (and least amount of risk) the more you want to pay upfront. The shorter the investment period (and more risk) the less you want to pay upfront.


Words of Caution for Real Estate Investments

As with any investment, know what you're getting into before you're into it. Research the market by comparing the prices of comparable houses that have sold in the area. This will give you a good idea if you are paying too much. The same will go for your mortgage. Know the terms and negotiate, negotiate, negotiate. Mortgage companies want your business (now and in the future). It doesn't hurt to request, or even demand, better rates or better repayment terms.

How Much Mortgage Can I Afford?

Before you ask yourself," How much mortgage can I afford?" you should ask yourself,"How much mortgage do I want to afford?" The reason for this is that different price points will require different mortgage strategies, as do different financial situations. If all homes were valued the same then it wouldn't matter. However, this is not the case.

To start, lenders look at two numbers, both having to do with your debt to income ratio. Typically, a lender will allow 28% of your gross income for your housing expense. This includes principal, interest, taxes and insurance (otherwise known as PITI). The second number is housing plus recurring debt. This incorporates any debt that probably won't be paid in the next 6 months or so (credit cards, child support, etc.) Lenders usually allow 36% of your total gross income to go towards this. A good thing to keep in mind is that with government loans (mortgages insured by the FHA) these numbers change to 29% and 41% respectively.

To illustrate, a potential homebuyer makes $40,000 per year ($3,333 per month). This allows them to allocate $933.33 towards a monthly house payment and $1,200 towards a house payment and recurring debt. Assuming this buyer fits the housing plus recurring debt requirements they would be able to take out a traditional 30 year mortgage between $92,700 and $102,978.51 with an interest rate of 6.75% and taxes and homeowner's insurance at the national average. This doesn't allow much to buy a house with.

A second scenario takes the same borrower and applies an interest only mortgage. Typically, with interest only mortgages the borrower saves about .25% on the interest rate. This is because the loan never actually amortizes. The mortgage in this case would carry a rate of 6.75% and would allow the borrower to be able to afford a house that cost roughly $175,000 (the payment would be $947.92). Since the interest only term is usually only three years by this point, the borrower would hopefully be making more money or would have sold. This option is good for borrowers who plan to be making more money or don't plan on keeping their home long term.

A third scenario applies a mortgage buydown. With a mortgage buydown, the interest rate is "bought down," which in turn brings down the monthly payment for a specific period of time. In the case of a 3-2-1 buydown the rate is bought down and incremently increases each year until year 4, when it reaches the proper level and remains there for the remainder of the loan. The kicker here is that there needs to be a lump sum of cash to apply to the buydown. This can come from the seller as a perk to buying the house, the lender in exchange for a larger interest rate after the buydown period is over or the borrower. This situation is especially valuable to someone that has recently come into a lump sum of money (inheritance, one time gift, etc.) but doesn't have the required income to make the monthly payments. In this scenario the borrower can buydown the interest (and, in turn, the monthly payment) in order to afford a more valuable house.

As you can see, there are several ways to afford more mortgage. Aside from the methods mentioned, there are also many government insured programs (these will be discussed in future blogs) that allow borrowers to borrow more than the value of the house in order to make improvements. With a little research and some financial creativity, you'll be on your way to purchasing the right home in no time.

You may also want use Mortgage Calculators to analyze different borrowing scenarios in order to make a more informed decision.

Adjustable Rate Mortgages - A Snapshot

An Adjustable Rate Mortgage (ARM) sets itself apart from traditional 15 and 30 year fixed rate mortgages by a) having an interest rate that adjusts to market conditions periodically and b)gives borrowers more options (and, consequently, more risk) when it comes to borrowing, repayment and more.

When you are approved for an Adjustable Rate Mortgage you get an introductory rate (usually less than current fixed rates), an adjustment period, an interest rate or payment cap and an index that will be used to determine the adjusting interest rate.

The introductory interest rate on an Adjustable Rate Mortgage is lower than that of a fixed rate mortgage because the borrower is assuming more of the risk. Think of it like this: you borrow money from a lender and the lender borrows money from a bigger lender. The lender has to pay interest to their lender for your mortgage. The interest your lender pays changes with the market rates. If they lend you money at a fixed rate they are assuming what is referred to as "interest risk." If the interest rates change they make less money on your loan because they have to pay more interest on it (while not being able to charge you more). With an Adjustable Rate Mortgage the lender assumes less interest risk because they have passed it on to the borrower. This allows them to charge a lower introductory rate.

The adjustment period on an Adjustable Rate Mortgage is the period that the interest it readjusted in. This can be 1 month, 1 quarter, 1 year, 3 years or 5 years depending on the mortgage. Lower adjustment periods will command a lower introductory rate because, again, the lender assumes less of the interest risk when they can transfer that risk to the borrower more frequently. An interest or payment cap is the maximum amount of money that the lender can charge the borrower regardless of how high the interest rate climbs. Obviously, interest cap refers the maximum amount of interest can be charged on an Adjustable Rate Mortgage and a payment cap refers to the highest possible payment.

Finally, the index is what is used to set the interest rate on the loan. When a borrower charges interest on an Adjustable Rate Mortgage they charge an index and a margin. The index is what the mortgage costs them and the margin is the rate they add on top to make money on the mortgage. The inded is a method of determining an interest rate based on specific market factors (which change from index to index). The most popular indexes used today include the 1-year Constant Maturity Treasury Securities (CMT), Cost of Funds Index (COFI), and the London Interbank Offered Rate (LIBOR).

The most popular types of Adjustable Rate Mortgages include Fixed Period ARMs, Interest Only ARMs, Minimum Payment ARMs, Hybrid ARMs and Option ARMs. Each type of Adjustable Rate Mortgage carries with it its own advantages and risks for borrowers. Having a solid understanding of these benefits and risks will save a lot of heartache from mortgage mistakes.

First, a Fixed Period Adjustable Rate Mortgage is very similar to traditional fixed rate loans. It has a set term of 15, 30 or 40 years. The only difference is that the Fixed Period ARM has an adjustable interest rate.

An Interest Only Adjustable Rate Mortgage is just as its name states. The borrower pays only interest for a predetermined number of years (usually 3-10). Once the interest only period ends the mortgage payment increases even if interest rates remain the same. This is due to the fact that nothing has been paid on the principal.

A Minimum Payment Adjustable Rate Mortgage has the absolute lowest monthly payment that a borrower is willing to accept. Often this is less than the interest due for that period, which creates a negative amortization effect (the interest that went unpaid is added to the mortgage principal). That said, the payment begins to rise because the principal itself rises and, in turn, makes the interest rise because its being calculated on a higher principal. This makes it plain to see that a Minimum Payment Adjustable Rate Mortgage can quickly escalate to a bad debt situation if only the minimum payment is made every month.

A Hybrid Adjustable Rate Mortgage is a mortgage that has a fixed interest rate for a set number of years then becomes an Adjustable Rate Mortgage for the remainder of the loan term. These are usually expressed as a ratio like 3/1 which means the loan is fixed for three years and adjusts once every year after that.

An Option Adjustable Rate Mortgage comprises all of the above mortgages. With this ARM the borrower decides which payment they would like to make for that month. This would include a fully amortizing payment (interest and principal), interest only or a minimum payment (usually negatively amortizing).

Adjustable Rate Mortgages are a very powerful financial tool but they must be used with caution and a clear and focused plan. If used to max out home buying potential a borrower may soon find themselves foreclosing and/or going bankrupt. It's very important to carefully review every detail of an Adjustable Rate Mortgage before signing on the dotted line.