Myths and Mortgages

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). Let's 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 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 mythical idea 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 isn't 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

mythical mortgages, too!