Mortgage News & Commentary - Mortgage Q&A Part I

By
Traci Walters, Oceans Funding Company, Inc

Mortgage Q&A Part I

October 4, 2006

Q. My husband and I are looking to purchase our first house.. We aren't finding the kind of house we want at the price I think we can afford. My husband talked to a Mortgage Broker who said if we took a “Pay Option ARM”, we could spend $200,000 more on a house and have the same payment. Could this possibly be true?

A. Sure… for about 3 months. The most popular Pay Option Adjustable Rate Mortgage is one that offers a "start" (or what we in the industry like to refer to as "teaser") rate of interest that is good for 3 months. The minimum payment on your loan, for the first year, is based on this teaser rate. However, the actual rate that you are going to be charged is going to increase the fourth month. This new rate will be based on an index and a margin, which is set when your loan terms are locked. A conservative estimate of your new rate, were it to be calculated today, is at least 6.5%. Furthermore, on your 4th mortgage statement, you will be offered three different payment options. Let's say, for example, you have taken a $250,000 loan. A regular payment that will cover principle balance reduction and interest (P&I) at 1% is $804.10. (not included taxes or insurance) Your P&I payment at 6.50% is $1,580.17. So, your payment options will be as follows:

1) Minimum Payment Due: $804.10.
2) Interest Only Payment: $1,354.17
3) Fully Amortizing (regular) Payment: $1,580.17.

If you chose to make the minimum payment, then the balance on your mortgage will increase by the interest that was not paid. Granted, the options exist; however, you took this mortgage because that minimum payment was what you were comfortable with. The bottom line is, I would never recommend this type of loan to a first-time homebuyer.

Q. My wife and I are refinancing the mortgage on our house. I had a friend recommend a mortgage broker he was very pleased with but my wife wants to use the bank where we have our checking account. Who should we use?

A. Get the information necessary to make an informed decision. Just because your friend’s mortgage broker did a good job for him does not necessarily mean he or she will do the same for you. And, banks do not always offer the better deal. Have a representative from each company give you a Good Faith Estimate (GFE) of all charges associated with the loan. Get this estimate in writing and compare the two. At a minimum, the GFE will tell you the interest rate being charged, the terms of your loan, and all the costs and fees that will go along with it. Frankly, it might be a good idea to call a third company for an estimate as well. When you finally make your choice, let the company know that if the terms or costs on the GFE change at any time during the processing of your loan, you want to be informed. Also, ask about locking in your interest rate, since all rates are subject to change until they are locked in.

Q. Is there really such a thing as a “No Closing Cost” loan?

A. Yes, but there is a catch. We all know that no one works for free, least of all banks and mortgage companies. You can easily decrease or eliminate the closing costs associated with making a mortgage loan by increasing your interest rate. Either way, the mortgage company is happy, since they make their money either via up-front fees or over time by charging a higher rate of interest. For you, the question is: do you want to pay more up front and less monthly, or less up front and more monthly? Ask your loan officer to give you the difference in dollars so you can make an informed decision.

Traci Walters
Mortgage Broker and guest writer for CompareLenders.com

Guest writers do not neccesarily reflect the opinions and views of CompareLenders.com / SBBNet, Inc.
All information is based on information believed to be accurate but we make no guarantees.