Home Mortgage Refinancing Guide

Pay Option Adjustable Rate mortgage loans are a new product many mortgage lenders report is gaining popularity. This type of mortgage loan gives a homeowner the option to make lower monthly payments by deferring interest, paying interest only, making a payment amortized for 15 years, or making a payment amortized for 30 years; this mortgage is the Swiss army knife of mortgage loans.

Many homeowners who are self-employed or paid by commission that have problems documenting their income benefit from this mortgage. This is the perfect mortgage for anyone with a fluctuating cash flow. This includes salespeople, contractors, even first time homebuyers that need the lowest possible monthly payment. These mortgages are called “Pay Option Refinance Home Loans” and are fairly new in the mortgage marketplace. The option presents homeowners a choice for their monthly payments?

You can make a 15 year payment. This will pay off the mortgage principal the fastest and build equity in your home while saving thousands in interest payments.

You can make a 30 year payment. This is comparable to a traditional 30 year mortgage.

You can make interest only monthly payment. This allows for a small monthly payment; however, there is no equity built in your home. On the plus side this will allow you to have more cash on hand.

The last option is a one percent minimum monthly payment. This allows you to make payments at an interest rate of one percent. The danger here is if you do not make the minimum interest payments on your mortgage each month the interest is tacked on to your principal balance creating a phenomenon called “negative amortization.” If you experience negative amortization first hand, you will end up paying more for your mortgage than you were supposed to, much more.

A major factor in choosing an adjustable interest rate or a fixed interest rate mortgage comes down to your tolerance for risk. Risk when related to mortgages comes in two flavors. As a homeowner you assume a risk pertaining to your interest rate and how it affects your monthly payment. For a mortgage lender risk pertains to whether or not you’ll make your monthly payments on time or default on your loan. From a lender’s point of view a high risk loan deserves a higher interest rate. If you are a homeowner with a low credit score you pose a higher risk because you haven’t paid your bills on time. If you are unable to verify your income to qualify for the loan you’ll have to pay even more on your interest rate.

From the homeowners perspective you are asking your mortgage lender to guarantee the interest rate on your mortgage. The longer you are asking them to hold this rate the higher the risk to the lender. The money mortgage lenders have to loan doesn’t come at a fixed interest rate. Their risk comes from what they have to pay to lend that money to you for the length of time you have requested. In other words, the gamble for mortgage lenders comes from how much it will cost them over the term of the loan. Because of this mortgage lenders charge higher interest rates for 30 year mortgages than 15 or 10 year mortgage loans.

As a homeowner considering a fixed interest rate mortgage you are interested in shielding yourself from interest rate hikes. When you take out a fixed interest rate mortgage you have the luxury of knowing what your payments will be and what interest you will pay for the duration of the loan. In a climate where mortgage interest rates have been rising like today, this is a luxury preferred by many homeowners.

On the other hand if you are a homeowner that only plans to keep the loan for 3 or 4 years and would like to take advantage of historically low mortgage rates, an adjustable rate mortgage loan could be for you. The majority of homeowners today keep their mortgage financing in place for less than five years. Circumstances change, people change jobs, families, banks, or maybe a better offer comes along and you?ll be refinancing the mortgage again. If you don’t keep the mortgage for 10 years you could be better off taking the lower adjustable interest rate and pocketing the savings.

Whatever you choose needs to depend on your circumstance. There are not good or bad mortgages, just mortgages that are better or worse for individual homeowners. Fixed rate mortgages make a great security blanket; however, you could save yourself a lot of money by doing your homework and considering your options.

Mortgage interest rates dropped slightly this week according to one survey of national mortgage lenders. Interest rates for a fixed thirty year mortgage dropped slightly to 6.26%. This is down from 6.28% the previous week.

Interest rates for fixed rate fifteen year mortgages did not change this week. Mortgage interest rates appear to be holding their ground as the market decides what inflation is doing; until this happens mortgage interest rates are expected to stay where there are. One year ago the fixed thirty year mortgage rate was 5.81% and 5.23% for the fifteen year fixed rate mortgage.

Interest rates for Adjustable Rate Mortgages (ARM) crept up slightly this week to 5.16% from 5.14% the week before for a one year loan. Hybrid 5/1 Adjustable Rate Mortgage loans (ARM) are up to 5.76% this week from 5.75% last week.