When looking into reverse mortgage options, it can be hard to decipher between fact and myth. It is important to understand the aspects of the program to make sure that it is right for you and your situation.
Some of the mortgage companies today, sell their mortgage packages with every kind of mythical benefit known to man, from the belief that interest only is a real mortgage that will eventually payout (slight of words, there) to the belief that an interest only mortgage carries a lower interest rate (which is does, but only for the short term). When talking about Myths and Mortgages, let us start with some of the more traditional loans, and move into the weird and unusual.
There has been a tremendous jump in the available interest only mortgage packages in the last three to five years, so maybe we should take a minute to break down some of these mortgages into a language everyone can understand.
There’s a 3/1 ARM: A 3 year ARM, means that the interest rate is locked in for 3 years. For the first month, the interest payment is only 1%, for the next 3 years following only the interest is due as the monthly payment. After the 3 year term, and for the remainder of the life of the loan, normally thirty years, the interest rate will change, and the payments will begin to include principal and interest.
There’s a 5/1 ARM: A 5 year ARM, means that the interest rate is locked in for 5 years. For the first month, the interest payment is only 1%, for the next 5 years following only the interest is due for the monthly payment. After the 5 year term, and for the remainder of the life of the mortgage, normally thirty years, the interest rate may change, and the payments will begin to include principal and interest.
These mortgages also come in 7/1 and 10/1 ARMs, but analysts really don’t recommend extending the interest only option out that far, since too many things can change before the 7 or 10 years is up.
The 10/30 interest only mortgage works in the following way: you borrow money in the form of a 30 year mortgage, with a fixed interest rate. The first 10 years are interest only payments, with the full amount of the principal being amortized (interest payments included) over the last 20 years of the loan.
The 15/30 interest only mortgage works in the following way: you borrow money in the form of a 30 year mortgage, with a fixed interest rate. The first 15 years are interest only payments, with the full amount of the principal being amortized (interest payments included) over the last 15 years of the loan.
These mortgages are really appealing to the consumer with any sort of investment knowledge. If I were going to borrower with the interest only mortgage option, it would be one of these two, the 10 or 15 of 30.
Now what other myths and mortgages can we find? There’s the belief that the home mortgage income tax deduction is a substantial benefit to the taxpayer, and that 1% interest only loans are for the life of the loan! Ha! There’s also the balloon note myth, that proliferates the belief you can automatically refinance through your current lender when the note matures, or that adjustable rate mortgages are a better deal than fixed rate!
Another thing about myths and mortgages is that the real estate market can’t go bust. An exploding growth rate in the mortgage loan industry, and the continued surge in real estate prices, has put the interest only mortgages in a huge category all their own. Up from the first part of the century, the interest only mortgage loans are now garnering nearly one-fourth of the mortgage loan market. That kind of growth is almost frightening, to even the most experienced lender. Can you imagine the possibilities, say four to five years from now, when many of these loans come due to pay the interest and the principal; what happens if our economy is not still a thriving bustling place?
The benefit of the interest only loan is that the consumer is eligible to buy much more house, than with a standard mortgage. That’s great if you’re certain in a given period of time, you’ll be able to afford a higher mortgage payment. But is anything guaranteed and given in this day and time? What if you can’t afford the payment when the interest only term expires?
We have only to look at the disastrous consequences of the crash of the stock market during the 1920s to appreciate where this may be leading us today. Many people had financed their homes with an interest only mortgage, and when the stock market crashed and there was no work, they lost everything, including their homes.
So, we not only promote mythical nursery rhymes, we promote myths and mortgages, too!