Written By: Glenn Michaels
Borrowers who reside in expensive markets may desire an Adjustable Rate Mortgage and/or an Interest Only Mortgage.
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Borrowers who obtained an Adjustable Rate Mortgage saw an interest rate and monthly payment reduction. In some cases the payments was 3o – 35% less than borrowers that obtained a fixed rate mortgage.
In the high value areas very often these mortgage programs were the difference for a borrower’s affordability of their residence in these high value areas due to the lower monthly payment.
The index values for most adjustable rate mortgage programs have been at historically lows. When you add the margin to the low index value and use the adjustment caps the Adjustable Rate Mortgage either fell in rate and payment or adjusted minimally.
The borrowers that obtained Interest Only Mortgages also benefitted greatly as their monthly payment for a stated period is significantly lower than a fixed rate mortgage. Many Interest Only Mortgage products offer interest only for the first ten (10) years of the loan term. When you analyze it, the beginning of most mortgage loans the payment are more interest anyway.
The Interest Only Mortgage is designed to allow a borrower to pay off the mortgage over thirty years with Interest Only for the first five or ten years. More borrowers will refinance their mortgage loan just before the end of the Interest Only period.
In a high end real estate market borrowers that do not pay the principal make the loan more affordable. In addition, mortgage interest is tax deductible and in most cases the borrower will realize a higher mortgage interest deduction when they file their tax return.
The so called “mortgage meltdown” pretty much eliminated any mortgage product that appeared to be risky. Mortgage Brokers and Mortgage Bankers were unable to offer these products due to Secondary Marketing pricing adjustments based on risk. Now that the dust has settled the Secondary Market is pricing these loans more competitively which is creating an Adjustable Rate Mortgage and Interest Only Mortgage market again.
The new Qualifying Mortgage (QM) rules and regulations that have taken place as of January 10, 2014 may curtail some of the riskier Adjustable Rate Mortgage Products, Interest Only Products, and loans with balloons.
Those that obtain Adjustable Rate Mortgages and Interest Only Mortgages need to keep their eyes and ears open to watch the interest rate trends so when the loan is about to adjust to determine if they need to refinance or to adjust according to the note and/rider.
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In reality no one knows what interest rates will do in the future. The old adage is still true, follow the bond market. Good news is bad news and bad news is good news as it pertains to the rates.
About The Author
Glenn Michaels - As an NAMP® staff writer, Glenn Michaels is a mortgage underwriting instructor for Mortgage Underwriter University (www.MortgageUnderwriter.org). As a BBA & FHA DE Underwriter, Glenn is a Pace University graduate who also graduated from New York University’s School of Mortgage Finance. Glenn has conducted numerous training classes and has worked in the mortgage banking industry for 38 years. If you're interested in becoming a writer for NAMP®, please email us at: contact@mortgageprocessor.org.
