7 mortgage loans you might have thought were extinct..but aren't!

From Yahoo! Homes...

 

You don't hear much about certain types of mortgages these days. Option ARMs, interest-only, stated income, no-money down, teaser rates – many of the most popular types of mortgages from the days of the housing bubble have virtually disappeared.

But are they really extinct? Or have they simply gone into hibernation, waiting to emerge again when the economic climate is once again favorable for them? While some of these truly seem to be gone for good, others have simply retreated to a specific niche in the market. And still others are beginning to re-emerge after a period of dormancy.

Here's a look at some of the better known "extinct" mortgages, along with what mortgage professionals have to say about their current status.

1. Stated Income

Stated income mortgages, or "liar loans" as they were known during the housing bubble, were widely blamed for enabling many borrowers to get into mortgages they couldn't afford. They're called stated income because no proof of the borrower's income is required – the borrower can simply state an income figure and the lender will accept it.

These days, you can't get a mainstream mortgage – a conforming loan backed by Fannie Mae or Freddie Mac, or one backed by a government entity such as the Federal Housing Administration (FHA) or the U.S. Department of Veterans Affairs (VA) – without documenting your income. However, specialized lenders are beginning to deal in them once again.

Why? Because stated income loans have long been popular with self-employed individuals who maximize the deductions on their tax returns, or who have substantial assets but whose income varies from year to year. As a result, their tax returns may not give a full picture of their financial state.
"You may have a doctor who has $500,000 in income but only $50,000 on his return," said Bruce Spector, a loan consultant with Summit Funding in Reno, Nev. "So that's great at tax time, but when it comes to qualifying for a mortgage, they can't do that."
A stated income mortgage allows such people to qualify on just their credit rating and assets, along with the appraised value of the property.

Spector said stated income loans are making a comeback because, in today's "yield-starved environment," where CDs and bonds are typically paying less than 1% interest, some investors are turning to privately funded mortgages in hopes of getting better returns on their investments.
"They're looking for returns, they're willing to take that risk," he said. "There's money in that, so they're willing to look at the non-traditional mortgages."

He said investment firms and private investors put together pools of money that they offer to mortgage banks and brokers to make available to borrowers. It's not a product that the larger banks typically offer these days, he said. Instead, they tend to stick to mortgages that can be guaranteed by an entity like Fannie Mae or the FHA.

2. No Money Down
It was pretty common to be able to buy a home with no down payment during the first half of the last decade. Some lenders simply didn't require them and you could even get a no-money-down conforming mortgage backed by Fannie Mae or Freddie Mac by taking out a "piggyback" loan to cover the down payment. These days, zero-down-payment mortgages are almost impossible for most borrowers to get. However, they're not completely gone. You can still get a no-money-down mortgage through the VA if you're a qualifying veteran or active-duty member of the military. Also, borrowers with low-to-moderate incomes may be able to get a USDA Rural Development loan with no money down to buy a modest home in a rural area or small community.

Though zero-down-payment mortgages are still hard to come by, it's becoming much easier to get a mortgage with a small down payment. In fact, it's even possible now to get a conventional mortgage with only 3% down without going through the FHA, according to Richard Whitman, vice president of mortgage lending for Texas Trust Credit Union. That's because mortgage insurers are becoming more comfortable with insuring those loans, he said.

"If you've got a good credit score with 3% down, the [private mortgage insurance] isn't that bad," Whitman said, referring to the private mortgage insurance (PMI) required on conventional loans with less than 20% down. Whitman said you can still get a 3% down Fannie/Freddie-type mortgage even with a credit score in the 660-680 range these days, although the PMI will be fairly costly to someone with a score of 720 or better. But increasing the down payment to 5% will reduce the cost of PMI significantly, he said.

3. Interest-Only

During the housing bubble, it was possible for a borrower on a tight budget to get a mortgage where they only had to pay the interest charges and nothing toward the principle – at least temporarily. Eventually though, they had to start making principle payments or refinance into a new interest-only loan. When falling property values made it almost impossible to refinance, these people had to start paying principle – and those who couldn't afford that lost their homes to foreclosure.

These days, virtually no lender will let you buy a buy a home with an interest-only mortgage. There is, however, one place where interest-only loans are still found – in home construction. Builders will take out a short-term interest-only loan to cover the cost of construction, which will then be converted to a fully amortizing loan when the home is completed and transferred to a new owner. "Those have always made sense for investors who wish to keep costs low during the first part of the loan, tie up as little money as possible," said Summit Funding's Spector.

Spector said he's seen interest-only construction loans coming back to a certain extent, but doesn't handle them himself. He said such loans are available only through private capital/hard money lending, similar to how stated income loans are handled these days.

4. Negative Amortization
Going even beyond interest-only mortgages were negative amortization loans. On these mortgages, it wasn't even a requirement to keep up with the interest payments – a borrower's monthly payment could be less than the interest charges, meaning that the mortgage balance, the amount owed on the loan, would actually increase – negative amortization. The most common of these were Option Adjustable-Rate Mortgages, sometimes referred to as "pick-a-payment." With these, the borrower could opt for a monthly payment that was less than the underlying interest charges, digging themselves further into debt as time went on.

"The Pay Option ARM had an adjustable interest rate, so while the borrower knew that they could make a tiny payment each month, there was the possibility that their interest rate would rise and the balance on their principal would increase even faster," said Sam DeBord, a managing broker with SeattleHome.com in Washington state.

DeBord described Option ARMs as "the ultimate boom loan" and "a terrible loan for the average homeowner," but a potentially good one for savvy investors to use for short-term projects where they wanted to minimize their cash outlay. He said he's only written one such loan in his entire career, for a multi-million dollar property where the owner wanted to keep his assets free during a remodel and paid it off shortly afterwards.

"If the Neg-Am had only been offered to highly-qualified borrowers, it wouldn't have been a bad product, but it was too complicated for the average homeowner and many made bad decisions in using it," DeBord said. After getting burned so badly on them in the downturn, it doesn't appear that lenders will be offering these types of loans again any time soon.

5. ARMs
ARMs are a type of loan that may seem to have disappeared after being wildly popular during the housing bubble years. In reality, they're still very much alive, though much less common than they used to be. However, some of their variations that were very common during that time – such as the Option ARM discussed above – have disappeared to the point where they are pretty much extinct.

Though many people think of ARMs as an "exotic" type of mortgage, they're actually one of the most traditional. In fact, in many countries they're the main type of home loan. They're called "adjustable rate" because they start out at one interest rate for a certain period of time, say 5 to 7 years, then adjust to a new rate based on current market conditions – a rate that could be significantly higher than the original one.

Demand for ARMs has shrunk dramatically since the crash, but not necessarily because people viewed them as inherently risky. It's because the rates on fixed-rate loans dropped so low that ARMs had trouble competing.

"The ARMs didn't dry up because they didn't want to do them anymore. They dried up because fixed rates dropped below 4%," said Charlie Walters, a Realtor with Walters Realty Group in Tempe, Ariz. "If rates go back to 6%, we'll see ARMs and we'll see a lot of them." What makes ARMs attractive is that their initial rate is usually lower than on an equivalent fixed-rate mortgage, allowing borrowers to minimize their monthly payments. But in recent years, the difference has been so small, most borrowers didn't see it as worthwhile, particularly when they could lock in a long-term rate at historic lows.

Even so, ARMs still occupy a small slice of the market because of the advantages they offer a certain type of borrower. "Over the last few years, we're seeing a bit of the ARMs coming back, particularly 5/1 ARMs, for people who aren't planning to stay in the home for more than a few years," said TCU's Whitman.
He said the loans are coming back in vogue for those borrowers because it doesn't make sense for them to lock in a long-term loan. Instead, they can get an ARM whose initial term matches the length of time they expect to stay in the home and save a bit on interest.
 6. Teaser Rates
What got people into trouble with ARMs wasn't necessarily the fact the loans were adjustable, but some of the features that were often combined with them. One of the most common of these was the "teaser" rate, where borrowers would start out with a very low rate, but the loan would later reset to a much higher rate.
Because these tended to be sold to borrowers who were poor credit risks, they easily got into financial trouble when the "teaser" rate ended and their payments increased. But the banks made enough off the loans to offset the high default rate, at least while home values were still rising.

As an example, Walters said that if fixed-rate mortgages were carrying a rate of 6% for borrowers with good credit, lenders might bring in subprime borrowers with a teaser rate of 3-6%, but that might reset to 9% in a fairly short time. Perhaps 7% would default, but the banks made enough off the other 93% to make it worthwhile.

But that all changed once home prices began to fall and the default rate increased.

"The whole subprime market started melting down, the lenders starting losing money hand over fist, like wildfire," Walters said. "It was like a switch flipped." Walters said the basic rule of lending is that if the reward outweighs the risk, the borrower gets the loan. It's still that way today, he said.
"It's just after the housing bubble burst and the meltdown, they just know those loans don't perform any more," he said. "The bottom line is, those things aren't coming back, probably never."

7. Balloon Mortgages
Somewhat akin to ARMs are balloon loans. These are where a borrower gets a loan at a low rate for a certain number of years, often seven, with payments based on a longer amortization, say 30 years. But at the end of the seven years the entire remaining balance comes due, hence the name balloon.

The idea is that borrowers would simply refinance the loan at that point. But when home values dropped, many found it impossible to refinance – and instead of simply facing a higher interest rate, they were stuck with having to pay off the entire loan.

Like ARMs, balloon mortgages tend to offer lower rates than comparable fixed-rate mortgages and for the same reason – the lender doesn't have to worry about being saddled with a low-rate mortgage long-term if rates rise in the future. They've also fallen out of popularity for the same reason as ARMs – because rates on fixed-rate mortgages have been so low there's not much advantage to them.

Balloon loans remain widely available, according to Patrick Palzkill, a real estate broker and mortgage originator with Beacon Rock Real Estate and Mortgage in Boston, Mass., but the current rate differential just doesn't justify it.

"Those are still out there, but they're just not practical right now, he said, noting that balloon loans work best in an environment where rates are likely to decline.
"No mortgage person worth their salt thinks rates are going to go down," Palzkill said.

Truly Extinct?

As for truly extinct mortgage types, Palzkill doesn't think there are truly that many of them. Risk is coming back into the market, he said, people want to borrow money and investors will lend it to them if they can make a profit.

"Things haven't changed that much," he said. Already, he said, there are tough credit hard money lenders coming back in the market who'll offer a mortgage to someone with a 500 credit score if they're willing to put 30% down and pay 7% interest with two points upfront.

"There're sharks out there who will take that," he said.

GREAT INFORMATION!  Share this with you clients and lending friends, they might need the info!

Call 903.200.4988 or visit www.HomesByLainie.com!

Why have an agent when you can have an entire team?  Homes By Lainie offers real estate, mortgage lending, credit repair solutions, and insurance, all in one stop for your home buying convenience! Visit us to see why Lainie Ramsey is the Lake Texoma property local expert! 

 ~Keller Williams Realty~

Want to possibly save some money on a mortgage? Well, of course! Read this!

Shared from our friends at Yahoo! Homes, this article is about the little-known mortgage that could save you big!

10-year, fixed-rate mortgages may be little known, but here are four money-saving reasons you may want to learn about them.

 

1. The Interest Rate on a 10-Year Loan is Much Lower (Compared to a 30-Year Loan)

If you're like most people, you refinance your mortgage for one main reason: to save money. So understandably, people usually focus on how their new interest rate will affect their monthly payment. 

But, focusing on the monthly payment alone can be detrimental to your savings! For example, even though the monthly payment on a 30-year will typically be much lower than with a shorter-term loan, the interest rate will be higher. So, you'll end up paying a lot more over the life of the loan in interest on a 30-year mortgage than you will on a 10-year. This is crucial to understand as the TOTAL interest, plus the purchase price of your home, is the true cost of your home. 

So, how much can you save in interest with a 10-year vs. a 30-year loan? Look at the average interest rates from August 13, 2013 according to PNC Bank. This compares a 30-year at a rate of 4.375 percent, with a 10-year at a rate of 3.125 percent, for a loan amount of $300,000.

	30-year mortgage	10-year mortgage
Loan Amount	$300,000	$300,000
Interest Rate	4.375 percent	3.125 percent
Monthly Payment	$1,497.86	$2,914.16
Total Interest Paid	$239,228.08	$49,699.74

That's pretty evident! If you can afford the higher monthly payment, you'll save almost a whopping $190,000 over the life of the loan!
  

2. Refinancing to a 10-Year Loan Won't Reset the Clock

Traditional wisdom says that if you've got fewer than 20 or 15 years left on your 30-year mortgage, refinancing probably should be avoided. That's because refinancing to another 30-year mortgage resets the clock on your mortgage.

But, refinancing to a 10-year mortgage with a low interest rate could turn that logic on its head, says Duffy. That's because most people who only have 15 or so years left on their mortgage probably have an interest rate much higher than today's historically low rates, he says. Why? Interest rates were a lot higher 15 years ago, and homeowners who haven't refinanced at all could still be stuck with these high rates.

For example, the interest rate for a 30-year, fixed-rate mortgage in January of 1995 was 9.15 percent, according to the Federal Reserve Board. Duffy says he recently helped a couple who only had 12 years left on their mortgage refinance to a 10-year mortgage.

"They initially had an interest rate of over 7 percent. They refinanced to a 10-year mortgage at a little over 3 percent," which saved them tens of thousands of dollars, he says. "So it was a terrific move."

3. You Can Build Equity Faster with a 10-Year Loan

Do you want to move in the next few years, but can't sell your home because it's worth less than the amount you owe on your mortgage? Refinancing to a 10-year, fixed-rate mortgage through a program like HARP, a government program that helps homeowners refinance their underwater homes, is one move that has helped more than a few people in that same situation.

How can this help? By refinancing to a 10-year mortgage, you can build equity faster, and own enough of your home so that it’s not underwater anymore when it comes time to sell. "I've done several 10-year loans for people who want to move in three years and the best way they can see to do it is to budget every month and pay that principal down quickly, so they do a 10-year fixed," says Duffy.

He says that the added benefit is that you can often get a lower interest rate when you refinance, and save a lot of money on interest as a result. Secondly, he adds, you could of course make extra payments without refinancing, but many know they won't have the discipline to put that money aside.

4 - A 10-Year Loan Allows for a Stress-Free Retirement 

The 10-year mortgage may be the right move if you're nearing retirement.

Here's why: For many people, their monthly mortgage payment is their biggest expense. Of course, when you're working, that may not be a big deal. But what about when you retire and you start seeing a lot less income?  That payment could become quite a burden, making your sunset years not quite as sunny. Worse, it could force you to sell your home, or put off retirement. Duffy says that these are two major reasons he's done many 10-year refinances.

"Homeowners are approaching retirement, it's on the horizon, and they reason that it's better to bite the bullet and pay more in a monthly payment while they're working and producing income than still have a payment when they're retired. It's all about getting debt-free by the time they reach retirement so they can really enjoy it," says Duffy.

Wow, those are some real eye-opening things you can discuss with your clients! With all the different mortgage loan and financing options that are available, education is always good!

Call 903.200.4988 or visit www.HomesByLainie.com!

Why have an agent when you can have an entire team?  Homes By Lainie offers real estate, mortgage lending, credit repair solutions, and insurance, all in one stop for your home buying convenience! Visit us to see why Lainie Ramsey is the Lake Texoma property local expert! 

 ~Keller Williams Realty~

INFO SHARE! Four Common Mistakes of First-Time Home Buyers

Here's another awesome tidbit of information to discuss when you're showing those anxious first-timers some homes.  Listen for their concerns, and help them weigh what's really "no big deal" versus a concern that's truly worth walking away from!

 

First-time homebuyers can get easily side-tracked by fixable "problems," like an unappealing paint color, and they often overlook hidden costs of home ownership like maintenance expenses. Such rookie errors are hardly their own fault, since they lack the experience that comes with owning property over time. With low mortgage rates luring many newbies into the marketplace, here are four classic mistakes they tend to make:

1) Being turned off by problems with the home that are easily fixed. 

According to a survey by Coldwell Banker in 2012, almost 9 in 10 first-time buyers are looking for move-in ready homes. They don't want to have to fix the kitchen or redo the bathroom before settling in. They also want to live near shops, their work, and "highly-rated" schools. They want (or, are really hoping for) that place that jumps out to them with all the stars perfectly aligned. These homes are the unicorn!

While location isn't negotiable, many smaller fixes are, such as a dirty carpet or scratched hardwood floor. 

Jane Hodges, author of the book "Rent Versus Own," was concerned about cracks in the plaster of her first home, but she later found they were just a cosmetic blemish that could easily be painted over. Home buyers should ask their your real estate agent for help understanding how costly fixes will be and to grill the home inspector as well. "Buyers sometimes focus on things like carpet, but that's really a renter's mentality. They forget you can make all these changes," Hodges says.

The buyer-friendly market means that many first-time buyers can satisfy their high standards. Most participants in the Coldwell Banker survey of 300 first-time buyers found they could buy a home sooner than they expected – and at a better price than anticipated. Four in 10 got more space, and half scored a neighborhood that exceeded their expectations.

The lesson: High standards can work to your advantage, but don't forget that some fixes, like cosmetic makeovers, are relatively easy (and cheap).

2) Overlooking hidden costs. 

In addition to the down payment and subsequent regular mortgage payments, home ownership also brings a slew of other expenses, from closing costs, to appliance maintenance, to homeowners insurance. That's why you should warn your clients against doing a simple comparison of monthly rental payments versus mortgage payments. 

Home maintenance typically costs 1 to 3 percent of the purchase price, which is as much as $9,000 a year on a $300,000 home. If their motivator is that rent is going up, they need to think about the actual annual operating costs. Homes that are distressed from extended periods of vacancy usually have added maintenance costs, just to get everything up to snuff. 

The lesson: Leave plenty of room in the budget to absorb the extra expenses of homeownership. That usually means borrowing far less than the bank approves and taking expected income fluctuations into account.

3) Failing to budget for DIY projects. 

Home improvement stores and scores of television shows make renovations look so easy, and seem to always focus on the romantic side of couples doing it together. This will put stars in their eyes! Recently, the art of fixing up houses has fallen out of favor. According to market research firm Mintel, the DIY home improvement market has fallen 21 percent in the last 10 years. The reason appears to be financial. While about one in four would-be-DIYers say they want to start on a major renovation, they simply can't afford it. 

The lesson: When purchasing a home, reserve some cash for needed DIY projects during the first year of home ownership. Make sure they realize the projects may keep coming, other higher-priority issues may surface first, and don't get in over their heads!

4) Misunderstanding new homeowners insurance coverage. 

New homeowners often falsely believe their insurance covers flooding, for example. A report from the Consumer Federation of America last year found consumers are often surprised by their expenses, including deductibles and coverage gaps, after they experience an event such as a hurricane or fire, requiring them to work with their insurance company.

The lesson: Read the fine print of your insurance coverage, and if you don't understand it, talk it through with your insurer.  Since there are bound to be plenty of unexpected costs during that first year of home ownership, padding your budget can prevent late-night panic attacks when the dishwasher starts leaking all over your new floor.  

Once again, things we as realtors don't always think about sharing with those first timers! 

Call 903.200.4988 or visit www.HomesByLainie.com!

Why have an agent when you can have an entire team?  Homes By Lainie offers real estate, mortgage lending, credit repair solutions, and insurance, all in one stop for your home buying convenience! Visit us to see why Lainie Ramsey is the Lake Texoma property local expert!   

~Keller Williams Realty~