The top six mortgage mistakes... or not?
April 02, 2014Last time I looked at numbers 1, 2, and 3 according to an article on the Yahoo! Homes website. This week we round out the top 6.
4. Reverse Mortgages. These loans have been oversold and are not the right product in any number of situations. The Reverse part of the Reverse Mortgage means that the borrower doesn't make a payment to the bank. Instead the bank makes a payment to the borrower. Instead of the principal balance declining, the principal balance increases. Another name for this is negative amortization. A different loan product called the option arm, which is also a negative amortization loan, caused a huge problem for any number of borrowers.
However, a reverse mortgage in the right set of circumstances is a godsend. I have been part of transforming the lives of the elderly. In one example, a widow had a $200 negative cash flow that was slowly but surely eating up her meager savings. We put a reverse mortgage in place and she then had a $400 per month positive cash flow. No more worrying about running out of money, no more scrimping and saving to keep the lights on and no more subsistence foodstuffs on the table. The perfect loan in this situation.
5. Longer Amortization. The normal loan term or amortization period is 30 years. Though they still exist it is rare to see amortization periods longer than that. There have been 40, 50 and even (in Japan) 100 year amortized loans. The ultimate amortization period is forever, which I will discuss below under interest only loans.
The fact of the matter is that very few loans are paid off in full over 30 years, especially in Southern California. Homeowners move, or refinance or pay their loan off in a lump sum well before the 360th payment is made. A longer amortization period means more cash flow each month that can be used for household expenses. In the right hands it is an excellent tool for managing finances.
6. Exotic Loan Products. As stated above, interest only loans are the ultimate in lengthy amortization. Most interest only loans either have a balloon payment, meaning that the whole loan balance is due and on a certain date, or eventually becoming an amortizing loan with a short 10-15 year amortization period. This can be a recipe for financial ruin in the wrong hands, but in a large number of cases it is, once again, the perfect loan product if matched to the right borrower.
The most popular loan product by far is the 30 year fixed rate loan. With interest rates as low as they are now, 30 year fixed rate loans are a safe and appropriate choice for the majority of borrowers. 15 year fixed rates loans carry a slightly lower interest rate and a higher payment that result in the loan being paid off in half the time. In a lot of cases this is the best loan for that borrower, if they can handle the higher payment.
All of the other loans above, with the exception of the Liar Loan, are the best loan when applied to the right borrower. Contact me to discuss your current loan or new loan to see if you are making the right choice for your circumstances.
John Yeager is the Valley Center Branch Manager for Summit Mortgage, NMLS #219612.
He can be reached at 760-749-8931 or by visiting www.john-yeager.com, or via email at email@example.com