Virginia Mortgage Bulletin

The Fundamental Question: Does An Interest Only Mortgage Save Me Money?

So here is an example of the math of a hypothetical 30 year mortgage compared to the same mortgage with an interest only option for the first 5 years.

$350,000 for 30 years fixed at 7.0%

The traditional payment, principal and interest, would be 359 payments of $2328.56 and 1 final payment of $2326.94 for a total of $838,279.98

That same mortgage making interest only payments for the first five years would give you 60 payments of $2041.61, then 299 payments of $2474.73 and 1 final payment of $2471.50 for a total of $864,616.97 for a difference of $26,336.99 .

While your payment during the first 5 years saves you roughly $287 per month, you will then pay almost $147 more per month for the next 299 months in order to pay the mortgage off by the end of the 30 year term. (more…)

That was the quote this morning on a local news show. If you believe the financial” expert”, homeowners just blundered into these bad loans, or were duped into these bad loan products and he recommended people should refinance now into conforming fixed rates loans to get out of these high-rate, subprime loans. . “These subprime loans were stupid”, he said.

Wow, how do I get to be an “expert” like this? Here’s the problem I have with comments like this, especially in the wake of all the press regarding the current real estate market. I agree that relatively loose lending guidelines and “cheap” money provided home ownership opportunities for some people that would not have qualified for mortgages as recently as 4 or 5 years ago. The untold story is that not all of these were bad loans, not all were sub-prime loans, and not all of these will result in foreclosure. If you believe some of the hype, there are as many as 17 million foreclosures expected within the next 2 years. That number seems incredibly high, since there are an estimated 50 million homeowners, according to recent census data. Even Senator Obama only predicts 2 million foreclosures, still a historically high percentage. (more…)

This past weekend, I spoke again with someone who purchased a home which will now, in all probability, end up going back to the bank. At times like this, I wish I had a voodoo doll in the likeness of the loan officer who originated this loan. Here is the story which is the epitome of the mortgage melt-down.

The story begins with a borrower looking for some cashout for improvements to his existing home valued at roughly $300,000 dollars. He chose a loan officer recommended to him who also spoke his native language. This loan officer told the borrower that for the projected refinance payment, he would be able to buy a larger, newer house in a neighboring county. So the borrower pulled the equity out of his primary residence, the loan officer refinanced him into a payment-option ARM to keep his payment low while he sold his house, and they used the down-payment to put a contract on a much larger home through a Realtor referred by the loan officer. So far, not so bad, except for the owner occupied loan on a property the LO knew would be sold. Now the real mischief begins. The borrower’s target payment for the new home was $1200 per month. The sales price of the new home was $575,000. (Hmmm, that’s what I said.) The down-payment of $82,000 was not enough to make the loan work, so instead of finding a lower priced home, the LO also originated a second mortgage of $16,000 on the first home and wrote both a first and second mortgage on the new home with a pay-option ARM as the first loan (at $1400 per month before escrows) and just over $200 per month on the second mortgage. Looking at the HUD-1 settlement statements, these two first mortgages generated $12,000 and $18,000 in commission-able revenue to the mortgage broker, excluding anything made for the second mortgages. (more…)

“A” credit loan – A mortgage for a very stable borrower with excellent employment and credit history. These are sometimes called “vanilla loans” because the meet general mortgage guidelines and are easy to complete. This type of loan/borrower often qualifies for the most attractive rates available. A credit score of 720+ is one of most important criteria in establishing a A rating.A credit is a very loose term that applies to basically just having good credit with a good score. You can have perfect credit, no lates ever, no collections and no derogatory credit ever and still have a low credit score and not be considered “A” credit. There may be many reasons for this low score. You may be maxed out on all of your revolving credit (credit cards and such) and have a lot of inquiries. These two items can negatively affect your score and remove you from the A credit classification. (more…)