Exotic mortgages: pros and conmen
Posted: 2006 Feb 23 - 20:59|
• Exotic mortgages is the name that has been given to innovative mortgage
products designed to offer borrowers the lowest possible payments in the
short or intermediate term.
Included in this category would be all interest-only loans as well as the
"option arm" which allows for minimum monthly payments even less than the
interest due. This is the popular mortgage commonly falsely advertised as
the 1 percent mortgage.
Please don't misunderstand. I strongly advocate the use of these products
in specific situations with astute borrowers. The problem is that the
ambitious salesmen, armed with these low, low payment options can originate
large volumes of loans to borrowers who have no idea what they're getting
We get countless inquiries at our offices asking if we can beat a 1
percent interest rate. We always respond by asking, "did the last lender
you spoke to leave you with the understanding that your rate would be 1
percent?" The answer is usually yes, and this blatant technique of
misrepresentation is running rampant.
With the surge in home prices over recent years, borrowers are looking to
move up but keep their payments affordable, and are attracted to the lure
of these "exotic" mortgage products.
Again, these products are not inherently dangerous, but the borrower
should be educated to understand the risks involved.
Specifically, at some point, you must begin to pay toward principal at a
rate that is often not predetermined. If you want to avoid the payment
shock of fully amortized payments you may have to regularly "go back Jack,
and do it again" and repeatedly refinance into interest-only or deferred-
interest mortgages to maintain affordability. If that's the case, you'll be
subject to closing costs, real estate market risks (property values) and a
potentially volatile interest rate environment.
What should you do?
Be relatively certain of a timeframe for your occupancy of the property.
Understand the risks and your capacity to manage them.
Integrate your mortgage planning into your financial planning.
Work with professionals qualified to properly and completely explain all
the mortgage products available.
There's another menu of products being introduced by select mortgage
lenders that helps alleviate the pain of payment shock and may help you
avoid the necessity to refinance.
Interest-only and deferred-interest loans with 40 year terms can offer low
payments initially as well as during the "payback" period.
If you would like to enjoy the confidence of knowing that the best
mortgage specialists in the business are serving your best interests, call
(561) 745-5575 in Jupiter or (772) 335-5556 in Port St. Lucie and make an
appointment for a free mortgage planning session. Also, please visit us at
Daniel J. Poulos is the president of Elite Lending, at 1232 W. Indiantown
Road, Jupiter in the Shoppes of Jupiter Creek.