"How to Analyze Mortgage Offers in The Mail and on Radio"

I always smile when mortgage companies want to help me save money or reduce my mortgage payment by a thousand dollars per month. I am sure you get the same offers every week in your mail box, and you hear them on radio as well. These new mortgages have a 1% interest rates and I even heard 1/4%. WOW!!!

I'd like to review these offers only to see if I'm missing something. The latest offer I got in the mail mentions that I could refinance my home and not make any mortgage payments for three months. How convenient that is!

Why would a lender make me such an attractive offer? The letter says, "I've earned it" and "my perfect mortgage payment history should be rewarded."

Let's take a closer look at this offer.

Suppose I have a $300,000 loan, which I'd like to refinance. The first benefit found in the offer is that I would make no payments for three months. If the loan has an 8.183 annual percentage rate (APR) I would save $2,247.90 a month or $6,743.7 during the first three months.

What else should I know?

A look at the fine print mentions that the loan has a "0% rate and a zero payment for the first three months". But, I read that the "APR is 8.183%". I understand that this is a "variable rate" and after the "start period" a low payment option might produce "negative amortization". If in fact I choose the lowest monthly payment option, I might be paying less than the actual monthly interest cost for my loan. My "Minimum Payment" will be $964.92 per month and my "Deferred Interest" will be $1,080.83. That unpaid interest payment will be added to my loan balance. After the first month, my new loan balance will be $301,080.83.

Repeat that month after month, and soon the party is over. Month 13th, your payment will rise by 7.5% (meaning your 1.00% rate is now 1.08%; actual terms vary). Thus, your monthly savings are now reduced. But you’re still paying less than the prevailing rate, which means you’re continuing to add to your mortgage balance!

Furthermore, the amount you’re adding to your mortgage balance "changes monthly". That’s because most "mortgage rates on option ARMs adjust monthly". In our example, my mortgage balance grew by the spread (the difference in payments between the 1.00% and 8.183% rates). But if rates rise, the spread grows, and this means my mortgage balance could grow even quickly. Be aware that the person who sells you the loan may tell you that your mortgage payment will be fixed. This is true, but since the rate adjusts every month and that you pay the minimum payment, the difference will be added to your loan balance every month.

Obviously, the lender won't allow me to make those negative payments forever. When the loan balance reaches 110% of the original loan amount $330,000.00, then the lender has the right to recast the loan. Once your loan reaches this cap, the lender will require that you pay enough each month to prevent the loan balance from growing further. And that means your mortgage payments may double or triple overnight.

So is this the loan you’d like to obtain? NO! Me neither.

The fine print also says something else. It turns out that to get this loan I must meet underwriting criteria, and I must be credit worthy. In other words, I must apply and meet all their criteria to get this great financing. The letter says I must respond within five days to take advantage of this great opportunity. I'm not sure what happens after the five day period.

As with all loans offers you receive or hear, you need to contact mortgage companies and lenders to see which programs are best for you and what rate you may qualify for. For me, I'll take a pass on this one I don't see much benefit in replacing my fixed-rate mortgage for a "low 8.183%" adjustable rate, and the rates can even go higher.
 

To Your Success,

Andre Plessis

Andre Plessis
"The Mortgage Guru"
"A Mortgage Professional whose primary goal is to provide the expertise, guidance and skills necessary to obtain the best mortgage to meet your personal needs".
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P.S. If you are at all intimidated or unsure about the mortgage process if you don’t understand how to evaluate your options in getting a mortgage loan our 24 key questions will help you feel comfortable that you are making the best decisions. Also if you are in the process of refinancing your home with anyone, CALL ME and I will let you know if you are being offered the best loan option based on market conditions and your financial situation.

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