Refinance Home Mortgage Guide

Mortgages traditionally came with few choices; you had to pick from 30 or 15 year loans with fixed or adjustable interest rates. Today’s marketplace has exploded with mortgage products for everyone in every circumstance. The American dream of homeownership has never been easier in the history of this country; nearly 69% of families own their homes.

The bad news is many of these families used risky mortgages to purchase homes they could not afford with traditional financing. This doesn’t allow them any cushion with their monthly mortgage payments. If the economy turns and interest rates rise sharply, these homeowners may find themselves overexerted in their monthly budgets.

The government has issued warnings to consumer groups and mortgage lenders stating that homeowners are setting themselves up for significant troubles. The Federal Reserve has also asked mortgage lenders to raise their standards for granting mortgages.

Tighter standards and higher interest rates could mean homeowners will have to pay more in 2006 to purchase homes or refinance existing mortgage loans. This is why as a homeowner, you must do your homework and shop around before mortgaging your financial future.

If you purchase a home with a risky option or interest only mortgage you could easily be burying yourself under more home than you can afford. With these risky loans once the principal balance comes due your monthly payment can quickly become unmanageable.

In a previous post we listed some basic mortgage terminology you need to understand regarding your mortgage. As a homeowner you need to understand mortgage lingo in order to make informed financial decisions. Doing your homework before shopping for a mortgage loan can literally save you thousands of dollars; brushing up on the terminology is well worth your time.

Here are several more mortgage terms that could prove handy to know.

Truth in Lending is a law where mortgage lenders are required by the Federal government to disclose information regarding the loan. The “Truth in Lending Form” your mortgage lender is required to provide you discloses any fees and the interest rate as an Annual Percentage Rate. It is the APR that accounts for the interest paid annually and factors in any other fees you pay. By comparing the Truth in Lending statements and the APR from a variety of lenders you will be able to choose which mortgage is the best for your situation.

Mortgage Underwriting is the process your lender goes through in preparing your mortgage. They will evaluate your credit, your income, and the appraisal of your property before approving you for the loan.

Mortgage Servicing is the recordkeeping your lender keeps on your mortgage. This includes collecting your monthly payments, billing, and paying taxes and insurance.

Reverse Mortgages are often referred to as equity conversion loans. This type of mortgage allows the homeowner to cash out equity in their home on a monthly basis. These types of mortgages are typically reserved for senior citizens. With a reverse mortgage the lender pays the homeowner every month. Repayment of the mortgage is deferred until the homeowner moves or dies.

RESPA is an acronym for Real Estate Settlement Procedure Act. This is a Federal law established to protect consumers and requires lenders to disclose key information about their loans. Lenders are not required to disclose this information until the application is received. The Truth in Lending form must be signed by the homeowner prior to closing.

Home Survey is a map of your property that shows legal boundaries, dimensions, structures and any other physical features of your home and property. It is used by the mortgage lender to describe the property securing your mortgage loan. If you default on the loan this information is used at foreclosure.

Title Underwriter is an insurance company providing title insurance for the property. Title insurance protects the interest parties from problems with the property title. These problems are referred to as “Title Defects.” Defects could include any lean placed on the property that was not found in a title search. The insurance pays any legal expenses resulting from title problems.

The logic behind traditional mortgages is simple, interest rates are low and as a homeowner you should lock in with a fixed interest rate, long term traditional mortgage loan. Interest rates for this type of mortgage are right around 6%. With interest rates this good why are so many homeowners opting for dangerous Adjustable Rate Mortgages? (Especially when this adjustable interest rate is going to rise sharply over the next few years.)

Most of these homeowners are blinded by the low introductory monthly payment. Not to mention you can qualify for a lot more house than you can with a traditional mortgage. The fact that when the introductory period ends the mortgage interest rate will be adjusted and the principal amount will be added in is a recipe for disaster for many homeowners.

Still, lured by savings as much as $500 per month on their monthly mortgage payments, homeowners have been signing up for these mortgages despite the risk.

Adjustable rate mortgages track a variety of market indexes for their interest rates. The lender will tack a percentage mark-up on top of this index whenever the interest rate is recalculated. When this happens the $300 in monthly savings you were enjoying could quickly become an additional $250 monthly liability. Interest rates are nearly impossible to forecast; however, the way interest rates have been going last year, they will surely continue to rise this year.

Supporters of Adjustable Rate Mortgages are quick to point out the average homeowner only stays in the same home for seven years. With that frequency of moves why pay extra for a 30 year mortgage? These are of course usually the people selling these loans.

Before you sign up for an adjustable rate mortgage loan consider the following. How long will you stay in your home? If you are 100% sure it will only be for a few years, get an adjustable interest rate mortgage. Make sure you operate your finances with a budget. Your monthly mortgage payment including interest, principal, insurance, and taxes should not be more than 35% of your income.

In today’s competitive marketplace mortgages are easy to come by. Some people are even cashing out the equity in their homes for everything from a cruise ship vacation to a new BMW; this is of course, not a good idea.

There are many unscrupulous mortgage brokers and even lenders that push risky loans on homeowners that are unaware or do not understand the risks. They sign up for these mortgages because the introductory periods come with extremely low monthly payments. The bad news is when the introductory periods end, the payments skyrocket.

Mortgage foreclosure rates in the United States have not yet been affected by this trend because these loans are still fairly new. Home values have continued to spiral upward and interest rates are still at historically low levels. The government has issued warnings to lenders and consumer groups about the coming problems with these risky home loans.

Below is a list of dangerous mortgages loans on the market and why you should avoid them.

Interest Only Mortgages

When you make interest only payments for 3 to 5 years your monthly mortgage payment can go up by as much as 25% when the principal becomes due. On top of that most interest only loans have adjustable interest rates that are recalculated with the current rate at the end of the interest only period. This can be a double blow to a homeowner that is having trouble stretching their dollars to make the interest only payments. Rising interest rates alone could raise your monthly payments by as much as $1,000! At this point it may be nearly impossible to refinance or sell the property if you get into trouble with the payments. Because you are not building equity in your home, you could end up owing your lender more than the home is worth if the housing market declines.

Option Adjustable Rate Mortgages (ARMs)

This type of ARM allows you to make paying interest “optional.” When you don’t make interest payments on the loan this amount is added on to the principal loan balance and begins compounding interest. This means that the amount you owe on your home could balloon to over 115% of the original balance over time. Eventually your lender is going to want this loan paid back and your mortgage payments may not be affordable.

Piggyback Loans

Piggy back mortgages are used if a homeowner doesn?t have 20% for a down payment when purchasing the home. The homeowner usually has to come up with 10% and the remaining 10% is “piggybacked” on the mortgage. Many homeowners do this so they will not have to purchase Private Mortgage Insurance (PMI). The problem is this debt could make your mortgage unmanageable down the road if your financial picture changes. This loans are made even more dangerous by lenders that offer them with interest only payments.

To be safe in today’s economy it is best to stick to a traditional, fixed interest rate, 15 or 30 year mortgage.