Posts tagged with Fixed Rate Mortgages

Interest Only Mortgages

  • Posted on November 15, 2010 at 11:26 am

These days, as people scramble for new and more creative ways to finance buying a home, the interest only mortgage is becoming more common and well known. An interest only mortgage is one in which you have the option of paying only the interest (or just the interest and a portion of the principal) each month in the early years of the mortgage loan. Interest only periods may be applied to adjustable rate mortgages, or 30 year fixed rate mortgages, depending on the lender.

In a traditional mortgage, each month your mortgage payment is divided in two parts – one part is paid on the interest charge, the other on the principal of the loan. The main feature of an interest only mortgage loan is that during a specified initial period of time – usually three, five, seven or ten years – you may choose to make a payment of the interest portion of the loan only. The option is flexible. One month you may choose to make an interest only payment, another you may choose to make an interest-plus-part-of-the-principal mortgage payment, or a full, standard monthly mortgage payment. Needless to say, an interest-only payment will be significantly less than a traditional mortgage payment.

The flexibility of an interest-only mortgage allows you to adjust your mortgage cost on a month by month basis, giving you more control over your monthly cash flow. In any given month during the interest-only period, you have the flexibility to pay as much or as little on your mortgage as you can.

Interest only mortgages aren’t right for everyone. While you have the option of paying interest only each month during the early years, the principal repayment on your mortgage loan is accumulating. At the end of your interest only period, your mortgage payment will take a dramatic jump. Financial experts recommend interest only mortgages for specific types of borrowers: those whose income is supplemented by large commissions or bonuses throughout the year, those who can reasonably expect to be making considerably more income in a few years than they are now, and those borrowers who actually WILL invest the difference between their interest-only payment and their full mortgage payment in profitable investments.

The power of an interest-only loan, according to most experts, is that you can ‘afford to buy more house’. Because you’ll have the choice during the early years of paying only the interest each month, you can effectively afford the monthly payments on a house that’s as much as 30% more expensive than you could with an amortizing (typical) mortgage payment.

You also, however, have the choice each month of paying the interest plus as much on the principal as you wish. If you’re a salesman, for instance, whose standard income is supplemented quarterly and semi-annually by large commissions or bonuses, you could pay interest-only during lean months, saving yourself up to $350 in those months. In the months that you get a large commission though, you could choose to pay down several thousand dollars on the principal.

An interest only mortgage also makes sense if you have a solid investment plan. If a typical mortgage payment would be $900 monthly, and your interest-only payment for the month is $625, then the best financial strategy according to many financial experts is to invest the remaining $275 in a solid, money-making stocks program.

Interest only loans are not for everyone, but they can be a valuable financial tool that can help you control your spending and give your investment power some added oomph. Don’t rush blindly into an interest only mortgage, but do speak to a financial expert or loan officer about whether an interest only loan may be right for you.

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Adjustable Rate Mortgages vs. Fixed Rate Mortgages

  • Posted on May 17, 2010 at 11:26 am

Buying a home can be an exciting and stressful time for anyone. While you may be excited at the prospect of owning your own home, especially if it is your first home purchase, the idea of choosing between all of the many different types of mortgages may leave you feeling confused and apprehensive.

Two of the most common choices youll find in the mortgage market are adjustable rate mortgages and fixed rate mortgages. Fixed rate mortgages are the most traditional type of home mortgage, offering a fixed interest rate that does not change throughout the life of your loan. There are a number of important advantages associated with this type of mortgage. First, if you are budget conscious, this type of mortgage will give you the peace of mind in knowing that your monthly mortgage amount will not change. You can budget the remainder of your financial obligations without worrying about a changing mortgage payment to throw things off.

An adjustable rate mortgage works differently. With this type of mortgage you may be able to obtain a lower interest rate than would normally be available with a fixed rate mortgage; however, the interest rate is not fixed. This means that your monthly mortgage rate may change as interest rates change. With such a mortgage you may not be able to regularly plan your budget due to such fluctuations. While there is usually a cap that will keep the interest rate from fluctuating too much, even a little fluctuation can be too much for some homeowners. Of course, there is also the possibility that interest rates will drop and if that is the case, because your mortgage is adjustable, your monthly payments will drop right along with the interest rate.

When deciding whether a fixed rate or adjustable rate mortgage is your best choice, you need to give thought to several factors. Ask yourself whether it is more important to be able to plan your monthly budget without wondering whether your mortgage will fluctuate or whether you would prefer to receive a lower interest rate in the beginning of your mortgage.

Remember that if you decide you would like to obtain the advantages of both you do have other options available to you. For example, if you feel the interest rate offered to you on a fixed rate mortgage is too high but you want the security of not having to worry about a fluctuating interest rate you can always buy down your interest rate by purchasing points. This will mean more up front costs for your mortgage; however, it may be worth it to decrease the interest rate, especially if interest rates are currently high.

If you do elect to go with an adjustable rate mortgage make sure you understand exactly how high the rates may go as well as ensure you have enough wiggle room in your monthly budget to cushion increases if they occur. This may help to keep you out of a tight spot and possibly losing your home due to rising interest rates.

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Adjustable Rate Mortgages and Negative Amortization

  • Posted on May 10, 2010 at 11:26 am

For many borrowers, adjustable rate mortgages are an attractive means of qualifying for a home. Fewer borrowers realize the potential negative amortization problems these loans can create.

Adjustable Rate Mortgages

Adjustable rate mortgages are very popular with home buyers. The popularity arises from the fact the initial interest rate on such loans is typically much less than one finds with fixed rate loans. As a result, home owners can squeeze into homes that they might not otherwise be able to afford with fixed rate mortgages.

The potential risk with adjustable rate mortgages is well known. A borrower runs the risk the interest rates will increase over the years, resulting in financial hardship when month mortgage payment amounts go up. If the rates and payments go up to much, the borrower can run into serious problems trying to make payments and may even lose the home.

To overcome the fear of rising rates, many lenders use caps on rate increases to entice home owners. These caps essentially limit the amount the monthly payment can increase for any fixed time period. For many loans, the period is one year and the rate increase is one percentage point. While this makes borrowers feel more secure, there is one little thing lenders fail to point out.

Negative Amortization

On many adjustable rate mortgages, the caps apply only to the monthly payments due on the loan. The caps do not apply to the actual interest rate being charged on the loan. This situation leads to a financial disaster wherein you are making the monthly payments, but actually seeing the principal of your loan increase. This situation is known as negative amortization and should be avoided at all costs.

Negative amortization is best explained using good old credit cards for an example. If you have credit card debit, and everyone does, you know that making the minimum monthly payment may not make a dent in the total balance. In fact, it may be less than the interest charged for the month. This becomes apparent when you receive the next bill and your balance has increased! Welcome to the world of negative amortization.

On an adjustable mortgage, you need to read the fine print to full understand how any caps apply to your loan. Whatever you do, try to stay away from negative amortization whenever possible.

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