David K's Financial Findings #2

Be a Savvy Consumer and Avoid the Pitfalls of a New Generation of Mortgage Products
By David Kanis

If you read the paper or watch the news on television you probably know that 'mortgage lates' and property foreclosures are on the increase. The pundits are blaming the mortgage industry for creating products like the option ARM (adjustable rate mortgage) and interest only loans to name a few.

Remember that every product in our consumer driven society was developed to fill a specific need. If it were not for interest only mortgages and the option ARMs, there would be a lot of people in high cost real estate markets like California still living in apartments.

Take responsibility for your decisions.

We as consumers need to take responsibility for our decisions by doing the research, and holding the lending community responsible for educating us about the products they are recommending. To aid you in this task here our five questions you need to ask your lender before you sign on the dotted line. Am I a good candidate for an adjustable rate mortgage?

What should the interest spread be before you refinance?

The interest rate spread between the thirty year fixed mortgage and some of the adjustable rate products is starting to widen. Your goal as a consumer should be to get the best possible interest rate for your particular situation. If you truly believe that you will be in your home for fewer years than the rate is fixed prior to its first adjustment period, then go for it. However, in case things change, make sure you understand how much and how often the interest rate could increase and what would that do to your monthly payment.

Should I stick with the tried and true 30 year fixed mortgage?

A long term fixed rate mortgage is good for the following kinds of buyers: "Individuals who have a low tolerance for risk" Retired people on fixed incomes or individuals who do not expect their incomes to increase significantly in the future " Investors looking for a long term secure source of predictable income Would an 'interest only' loan make sense for me?

Should I avoid interest-only mortgages?

Interest only loans are not inherently bad. They have the advantage of offering the lowest possible monthly payment but you can still make payments to the principle balance during the 'interest only' period. They are a great choice for young professionals who can anticipate a significant increase in income over time or baby boomers buying second homes who will pay off the mortgage when they sell their primary residence. Do not take out an interest only mortgage in a geographic area where real estate vales are stagnant or depreciating.

Should I choose an 'option' ARM?

Option ARMS were developed to provide consumers with the ultimate flexibility. The interest rate starts out at a lower rate than the current market for a 'teaser' period, usually 6 months to 1 year. After that point, the rate can adjust as often as monthly based on one of several financial indexes. Each month the consumer can choose to pay a 'minimum' payment, or an interest only payment, or a 30 year amortizing payment or a 15 year amortizing payment. If the consumer chooses to only make the minimum payment, the loan can build what is called negative amortization; that is, you can end up owing more than you originally borrowed. Option ARMS are loans for financially savvy consumers who have significant financial resources at their disposal and have a high tolerance for risk.

Could you explain mortgage options to me?

Every consumer, even those with imperfect credit - has at least several loan programs which might suit his or her individual needs. Don't let a lender make only one recommendation to you. Ask to see three to four loan options including a breakout of the monthly payment for each type of loan. Then ask the lender to review the pros and cons of each option with you. Don't be afraid to ask questions. The only stupid question is the one you don't ask. As consumers we have all bought items that we wished we hadn't. There is too much at stake to let your mortgage fall into that category.

Remember, you usually get what you pay for in any transaction. Be smart and shop wisely!

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ABOUT DAVID KANIS
Also known by clients as "David K," David Kanis has been involved in the mortgage business for almost 20 years. Beginning as a loan origination officer, he is now branch manager of Ashford Mortgage Advisors in Asheville, NC. For more about David K, Click Here

ABOUT ASHFORD MORTGAGE:
Ashford Mortgage Advisors
Address: 149 South Lexington Ave., Asheville, NC 28801
Tel: 828-350-8886 Fax: 828-350-8887
Website: ashevillehomeloans.com or Click Here
Email: davidk(at)ashevillehomeloans.com

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*Copyright 2008-2009 Ashford Mortgage Advisors All Rights Reserved
*Reprinted by Mediabear with permission