Published: June 07, 2006 11:23 am            

Five ways to beat rising mortgages

EDMOND — Recent spikes in mortgage rates seem to have slowed the near rampant pace of mortgage lending. But homebuyers and those looking to refinance don’t need to be put off by the recent jump from 45-year record low rates.

Whether you need to keep your monthly payments below a certain amount to qualify to buy a house, or you failed to hop on the refinancing bandwagon soon enough, there is a host of mortgage products that are gaining favor in this environment of rising interest.

The below 6 percent rates that promised financial nirvana for many may have come and gone, but that is only true for traditional 30-year fixed rates. Those rates are still out there, just not in the form of a traditional 30-year product. And lenders everywhere are finding people who are much more willing to look at alternative mortgage products like adjustable-rate and interest-only loans.

Mortgage loans can be tailored for almost any individual need. The array of products is staggering and most lenders only offer a few of the many products that are available. Lenders now provide a greater selection of mortgage options that can possibly be good fits for the customer, but it means they have to spend more time inspecting the specific features of the loan. The educated consumer will study the payment process over the life of the whole loan.

There are many different types of adjustable-rate mortgages (ARMs) that are becoming more popular with customers.

n Interest-only ARMS — Some of the ARM products today are offered both with principal that amortizes normally and also includes an interest-only feature as well. These features can considerably lower your monthly payment. By cutting out payment on the principal amount borrowed, monthly payments on a 6 percent $200,000 loan may be $1,000 compared with $1,200 for a principal-included mortgage payment. The ability to deduct mortgage interest from your total tax bill is a plus, but you should be aware of the potential drawbacks of paying only interest. These loans can be somewhat more sensitive to price changes than a fully amortizing loan.

n Negative amortization — This loan program takes the idea of an interest-only idea a few steps further. Not only does the principal balance go unpaid, but it actually increases as borrowers underpay their loan. Every month there is a shortage between what is paid and the percentage at which the loan is amortizing. And this difference gets added on to the principal balance. These types of loans can be risky in a housing market where prices stay flat or rise only slightly for an extended period of time. Negative amortization tends to be avoided when rates are low but with rates on the rise, customers may soon warm up to its advantages.

n Balloon mortgages — These products perform exactly as their name implies. Balloon mortgages typically offer below-market interest rates for a term of either five or seven years and then escalate payment amounts at the end of the loan. Balloon mortgages typically allow a borrower to get a bit of a break on the rate, but can also be less attractive because the borrower has to pay off or refinance the entire loan by a specific date. Most people choosing a balloon loan view it as a short-term vehicle benefiting their cash flow.

n Hybrid ARMs — These are a combination of adjustable and fixed-rate products that either start out a fixed-rate and become adjustable or vice versa. These products are different from a balloon because a balloon can start out either fixed or adjustable but at a certain point the entire balance is due. With a hybrid, this isn’t true. It’s only the terms that change at a particular point in time.

n Pay Option — You should consider this product to be identical to a monthly adjustable-rate mortgage. Borrowers will see up to four payment options on their monthly statements, allowing them to choose between the minimum payment, an interest-only payment, 15-year or 30-year amortizing payment. Borrowers are required to make at least the minimum payment, which consists of a start rate as low as 1 percent amortized over 30 years. The interest rate on this loan can adjust monthly, but the payment is fixed for one year with a preset annual maximum payment increase.

These loan products can be the solution for many customers with one caveat. The lowest rates are still reserved for the customers with A paper credit scores.

        

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