Rates on mortgages are lower than they have been in forty years. This
provides a huge opportunity for new and existing home owners, but also
carries risks that can have a substantial impact your ability to pay in the
future. Mortgage lenders are inundated with work, and it was recently
reported on national news that "if you can breath, you can get a
mortgage." This phrase should at the very least frighten the average
mortgage customer. It indicates that not only are the mortgage companies
finding new ways to make money off of their huge list of clients, but they
are also circumventing the risk analysis that avoids putting high risk
customers into immediate credit trouble.
The opportunity is immense. For many home owners, monthly mortgage
payments can be reduced by ten to fifteen percent through a refinance. For
new home owners, they can afford to pay ten to fifteen percent more because
of resulting low monthly payments. The benefits are substantial and if
addressed properly, the risks can be avoided.
The risk of course is choosing a form of financing with inherent
uncertainties and putting your long term financial situation at risk. One of
the most popular mortgage products available today are variable (floating)
rate mortgages. The mortgage rate varies with the current Treasury rate
until it is locked in at a set amount above the future treasury rate three
to five years after the date of origination. Many mortgage customers are
fond of this type of funding because it allows them to enjoy a very low rate
for the next three or five years. Unfortunately, the risk involved with this
type of loan is huge, and can have substantial impact on the customer’s
ability to pay.
Given that rates are at a forty year low, it is very probable that
interest rates will climb substantially within the next three years.
Although most of these variable rate mortgages have interest rate caps where
the lock in rate will not exceed twelve percent, the impact of a rate
increase during a lock-in period can be substantial. To provide an example,
suppose you have a $200,000 variable rate mortgage with a 5.5% interest
rate. When you first originate the loan, your monthly payment will be
$1,135. If interest rates increase to 12% by the time of your lock in
period, your payments will increase to $2055 per month; where they will
remain for the life of the mortgage. For many home owners this type of
increase will quickly lead to default, eviction, and bankruptcy.
Keep in mind that mortgage lenders are sales people, and mortgage brokers
are essentially selling you a product. They make money when they sell you a
mortgage. With the current emphasis on low finance rates, they are inundated
with business, and are more focused with getting the loan closed than with
evaluating your future ability to pay. As sales people, they have been given
a number of products to sell, and because of the current frenzy, have been
given substantial leeway from the banks. Therefore, they can forgo many of
the risk analyses that were necessary during leaner banking times and sell
whatever mortgage product is available.
With mortgage brokers trying to fund all of the business that they are
given, and with mortgage products that carry high uncertainties, the risk
associated with purchasing or refinancing is higher than ever. If
refinancing or funding a new mortgage is the best financial decision for
your specific situation, be aware of the risks, quantify the benefits, and
realize that your mortgage lender has a vested interest in closing the deal.
------------------------------------------------------------
ABOUT IP WARE
http://www.freetrainer.com
With IP Ware Real Estate Investment Software, you can evaluate rental
properties in seconds. Weed out unfavorable properties in minutes, and save
weeks of research with a quick and concise analysis. Begin using this
amazing tool TODAY! http://www.freetrainer.com
