Since mortgages are the straw that brought the "little piglets" house tumbling down, let's take a look at what was failed to be asked of the banker loaning the money.
A mortgage allows the buying of a home or property over time and there are all kinds. Some of them as many unfortunate home buyers have found out are totally risky and for the unwary are home owner fatal. Let's start with the riskiest which only an adventurous investor should even CONSIDER. However, in the recent past too many non-risk takers were encouraged to use these with a resultant loss of the home. KNOW WHAT THE AGREEMENT MEANS!
Option ARMs (ADJUSTABLE RATE MORTGAGES) are flexible and allow variations in payment, from small amounts to large but they also allow your interest rate to change or fluctuate. A lower starting rate is sometimes given by the lender (MORTGAGEE) because there's more acceptance of risk on the buyer's part (MORTGAGOR). Of course when rates go DOWN, WOW! WE CELEBRATE; when rates go UP, YIKES! WE SCRAMBLE as the monthly payment SOARS.
STAY AWAY FROM THESE unless as an investor who knows the ropes.
There's something called NEGATIVE AMORTIZATION loans also VERY RISKY. Allows payment of less than the interest that is due over a specific length of time and can be part of Option ARM loans. In this bad case scenario more is owed at the end of the month than the beginning of the month. Like the old "one step forward, two steps back." NOT GOOD.
INTEREST ONLY loans. Paying interest only means nothing is being repaid on the PRINCIPAL (loan) borrowed. The danger is there's no equity (ownership) in the home and if it loses value the original amount must be paid before it can be sold. This is definitely not for amateurs!!!!!!
Whether fortunately or unfortunately a banker is not a good friend. The banker is there to make money like a salesman in a TV or computer store (they're going to hate that analogy). His / her position and salary is based on the ability to do a good job of selling whatever makes the most income on the money being loaned. The same is true of the individual mortgage company and even more so.
Of course, there has to be some concern about other kinds of accounts and repeat business but it's grown to be less and less over time with many businesses taking the attitude that they are doing the customer a favor by selling them anything. And unfortunately consumers agreeing!Many personnel in banks in the last ten years have followed pre-ordained mortgage formulae and probably haven't known much more than the buyer about what they were suggesting as stand-ins for the lender. A very disastrous condition!!!!!!! The same kind of advice we find in computer stores where most of the help doesn't know their behind from a hard drive. Except in mortgages, a lot more is invested and can be lost.
THE BEST BET IS A FIXED RATE MORTGAGE (Interest is the same throughout the loan)hopefully with a low interest rate (6% or below) and with payments you can afford because you've put a GOOD SIZE down payment (10%) or above and are willing to stay in the home you've chosen for a long period of time. MAKING THE RIGHT CHOICE is an important part of purchasing with a mortgage to avoid loss when markets swing downward.
The advice is to shop around for the best fixed rate and get quotes from several lenders. Remember hating banks is no excuse for ignoring that they are the best chance of lender stability. Not all individual lenders are honest and fixed rate mortgages can have a number of built-in fees in the final payment. Ask what they are and get it in writing so while nervously forgetting to listen, the list can be referred to later. Ask questions and ask why. A lender may waive a fee or two if you appear to be a good borrower.
FIXED RATE MORTGAGES allow the mortgagor (YOU) to know what the amount paid monthly will be for the duration of the mortgage . When the home is sold whatever remains on the mortgage must be paid off and the rest of the equity (money) goes to the home owner's pocket. Although mortgages all used to include a prepayment penalty clause (can't pay it off before ending date) now most mortgages don't carry that and the borrower can make larger payments to reduce the loan and interest monthly if desired.
However, if the mortgage has a prepayment penalty, it is possible to make a deal with the lender that a windfall during the mortgage term, can allow the balance of the loan to be paid off without penalty and remaining interest forgiven (skipped). It not only shows "GOOD FAITH" (will return money) but expectations of better days ahead (such as an inheritance).
The current types of fixed rate mortgages are for fifteen years or thirty years according to your ability to repay the loan. Other time frames exist but aren't used as often. Remember that fixed rate mortgages generally have a higher monthly payment because of the safety factors. The higher monthly payment but it stays the same through bad interest weather and good and allows for greater payment of the principal. It's stability is its greatest ASSET! This the house of stone that the Piglets finally built and the Wolf couldn't blow down!!!!!
Second mortgages are available at a fixed rate and are recorded as a second lien on the property but are paid off only after the first mortgage is cleared in case of default so it's more risky for the lender (MORTGAGEE) and are mostly offered from five to twenty year periods and usually are secured by higher interest. It's not something to be used lightly but there are financial circumstances that may require further mortgaging of a home.
AMORTIZATION CALCULATIONS help show how a loan is repaid. It shows how a debt is eliminated over time with regular payments. How much principal and how much interest is paid each month. A portion of your payment on a FIXED INTEREST LOAN reduced your loan balance and a portion of your interest. At the start the interest is the majority of the payment made. In time the balance covers more of the loan thereby "amortizing" the loan. Here's an example:
Using a sale price of $280,000 with $30,000 Down (10%+) leaves $250,000. for an interest rate fixed loan at .0590 (5.9 %) over 30 years with a monthly payment of $1482.
Split of FIRST PAYMENT ON LOAN:
INTEREST: $1229.16 PRINCIPAL: $253.67 (1/1/10)
AFTER 30 YEARS!!!!!!!!!
Split of LAST PAYMENT ON LOAN:
INTEREST; $OOO.02 PRINCIPAL $1482.74 (1/1/40 )
FREE AND CLEAR!!!!!!!!!! If you pay the two cents!!
There was a rule of thumb on mortgages at 5% to see what they really cost many years ago. Multiply the principal by 3X and it comes out to in this case $750,000 .+ Prepaying balance in any way saves a tremendous amount of money and THE HIGHER the interest, the more the loan costs. This estimate does not include any other costs "OF DOING BUSINESS", the phrase from our company "Up Yours".
THIS MUST BE CLEAR!!! This is DOING BUSINESS JUST LIKE A COMPANY!!!! And so it is up to the buyer to learn what must be known or to have or hire someone to offer advice when making such a major purchase.
It's a pain in the galoshes I know but the purchaser is at a distinct disadvantage without the necessary knowledge to conduct mortgage business. The borrower is dealing with a BUSINESS person, equipped with the backing of lawyers, accountants and other gurus advising and consenting to the loan of this money. WHO THE HELL HAVE YOU GOT BEHIND YOU??????????????
CHEERS, CONNIE
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