By Ron Monroe – PHH Home Loans
Didn’t we drive around just a few years ago and see all these “starter castles” popping up all over the place? It always amazed me that these BIG homes were popping up all over plus they had a Hummer or two in the driveway. What do all these people do I wondered?
Today we realize that many of these people were living beyond their means. Taking money from the equity of their home to buy cars, trucks, snowmobiles and any and everything they wanted. Sometimes it may be necessary and if you plan on staying in the home for several years (more then 7 years I would say) you know what, maybe that isn’t that bad of a thing after all; it’s your equity and why not if it makes sense. In some cases these people are going all the way up to 120% of their homes value though. Today with the tightening of guidelines it would be very difficult and maybe not even possible to get up to 100% or more of the value out in order to pay off debt or buy that next toy or vacation.
What types of loans are being foreclosed on?
All types are being foreclosed on. In my opinion its things like these signs we would see along the highways. We have all seen them; $300,000 mortgage for only $250 a month. That may not be the exact numbers but you see the point. We have all heard that something that sounds too good to be true probably is, right? While it’s true you can get a ridiculously low payment on a mortgage did you know that these types of loans are typically a negative amortization loan? So what is a negative amortization loan, just like it sounds it’s negative. Instead of paying your loan down you are essentially increasing your loan balance. When your house payment is even less then an interest only payment you are actually increasing your total loan balance and then if the housing market values stop increasing and actually decrease, guess what; you actually owe more then your house is worth. Don’t get me wrong this loan is great for some people but not the majority. This type of loan may have been pushed on people that didn’t even truly know exactly how it worked. They just knew it was a home and the payment was about the same as a car payment so why not.
Another type of mortgage is called an ARM (Adjustable rate mortgages) are also great for some people and at times where about the only way some people would qualify to get into a home. Typically an ARM will have a lower interest rate then a fixed loan would. The idea is that you have a certain amount of years at a lower fixed rate and during that time you are improving your credit so you can qualify for the best going rates in the future.
Another reason for an ARM is where someone is buying an investment home and prefers to have a lower payment for a fixed period of time. For example you might want a 5 year ARM which essentially means you have a low rate set for 5 years but after that five years is up it will increase resulting in a payment increase. If you’re just looking to rent it out for 4 years and make a profit when the home value has increased this can be a great loan for you as your payment is low enough where you can off set it with a renter and either have a profit each month or even if the renter is just making what your monthly payment is you will hopefully make the money off the equity you have gained form when you bought it to when you sold it.
Did you know you can no longer do an 80/20 loan? You need to put down 5% -10% on a conventional loan. But there are still FHA loans which only require 3% down (increasing to 3.5% come 2009) and VA and rural development loans which essentially can be done for little to money down. It’s good that we no longer do 80/20 loans for the people with credit issues. There is a lot of money available to potential home buyers and yes there are stricter guidelines but don’t you think that is a step in the right direction?
If you have any questions about your current loan, need a new loan or refinance give me a call today, Ron Monroe at (651) 398-7673.
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