Orlando Mortgage Blog

Every so often I go back and look at a few of my previous blogs and this one from June 21, 2007 is still relevent today...I mean really!:

I was just thinking...

Humerous Mortgage Ads!

• What's the difference between home ownership and foreclosure? Prompt Payments...

Misleading ads. I've been in the mortgage business many years and even I'm tired of them. Aren't you? First of all you can't get your key in the front door until you remove the flyers and their industrial strength rubber bands from around the knob (careful not to trip over the latest gift from the phone book fairy today). It only takes five minutes to thumb through the 2 inch stack of flyers and official looking envelopes in today's mail. You did get a pizza coupon that you place under the Realtor® fridge magnet with it's 2005 calendar.

Before starting on tonight's takeout dinner, you sit down to relax and the phone (on the other side of the room) rings and it's a mortgage consultant wanting a moment or two to complete a "very important survey". After hanging up on them, you click the remote to see the same mortgage commercial on all 184 satelite channels. It's telling you they know yur "Smart" (unlike everyone else that thinks you're dumber than a rock, right?) as if that alone will make you want to call them to apply for a mortgage. The blurred disclaimer at the bottom of the ad looks like it was badly hand printed by a three year old with a broken pencil (apologies to all three year olds). The message? You're so smart you might want to actually read it?

You decide to keep flipping and other than the same "Breaking News" report you watched at 7 AM this morning it's another company advertising another Great Rate (the rate is 6 inches tall on your new big screen TV and can be read by those folks up there in the space shuttle) but you can't read the details on the disclaimer block before it disappears faster than the last biscuit on a boarding house platter at meal time. You're ready for it next time.

Your remote has a "FREEZE" action button and you zap it before it even knows you're trying! Aha! That 5.625% rate with the 5.98#@*% APR has two points in it (that's just $4,000 on the $200,000 loan you've been thinking about) and it was available the week of March 15, 2007. GREAT! Ok, then you remember today was June 21, 2007. That was over 90 days ago. When you call to see if it is available you are told no, "We're not a lender, we just provide quotes from various lenders." But, they ran that "Great Rate" in their ad for 3 months. They did make certain to disclose that "rates are subject to change" in the ad. That makes it ok, right?

Bill Wilbanks /  www.OrlandoMortgageMasters.com 

OPTION ARM LOANS - Why I don't like them...

They go by many names. in my opinion they should be known by one: Potential TIME BOMBS! Asking some people to manage the negative amortization potential of this product is like the cloudy glass of water to the guy dying of thirst in the desert. He'll ask why it's cloudy later, right?

Generally known as PAYMENT OPTION ARMS. These adjustable rate mortgages (ARM) allow you the option of 4 payment methods each month. Some begin adjusting within 30 days and each thirty days thereafter. Other options can fix the payment and in some cases the rate for 3 months, 6 months, 1 year, or up to 10 years. For example purposes, I'll use a typical 5 year fixed rate option.

Basically, this mortgage has the note rate fixed (expect it to be higher than a normal 5/1 interest-only ARM) for the first five years. You may select from four payment options monthly for the first 60 payments or until a predetermined negative amortization cap is reached, usually around 115% of the initial loan amount, whichever occurs first depending on the payment method you select. Thereafter the loan enters an interest-only phase based on the current note rate until the end of the tenth year. At the end of the initial 5 years, it will adjust to a 6 month LIBOR or T-BILL index each 6 months for the life of the loan. At the end of ten years it will fully amortize (you make a full payment on the unpaid balance) for the remaining term of the initial 30 year loan. That's a mouth full, huh?

Back to the 4 monthly payment options in the first 5 years:

• You can make the minimum interest-only payment which is determined by taking the initial note rate minus 3% (which is the primary reason most borrowers are attracted to begin with). This results in negative amortization of course each month it is selected. The balance goes up in accordance to that month's interest shortfall.
• You can make an interest-only payment calculated on the actual note rate. No balance decline and no negative amortization that month.
• You can make the full interest and principal payment.
• You can pay more than the standard payment and shorten the term.

So, why do I prefer not to offer this loan to my customers? It's simple, really.

On a typical $200,000 loan you might expect an Option ARM to be priced about .50% +/- (1/2%) higher that a normal 5/1 interest-only ARM. The reason why someone might take the higher note rate ARM is because it offers a interest-only payment rate as in the first bullet point above that is 3% below the note rate each month for the first 5 years. Compared to a standard 5/1 I/O the payment difference would be a savings that month of about $500. Enough said? If they took the loan because of this lower payment option, they may continue to do so all year. That's a $6,000 shortfall or negative amortization that year. And, anything they add to their balance is now "interest bearing" too (that's how these TV ads show you the payment that's ridiculously low on that $200,000 loan amount by-the-way). Is your home appreciating by 3% or greater yearly right now? The current national annualized value has declined and year over year is down 2.7% (that's a national average $5,400 value decline on a $200,000 property). Your region or neighborhood may be more or less of course.

Real world? Sure is. I get calls from customers all the time with an Option ARM they want to get out of it. By the time they tell me their Florida home has slid a "little" in value since they bought it 2 or 3 years ago, and that their balance is now $12,000 to $18,000 higher, one of two things has become glaringly apparent. They are now going to be well over 80% financing in many cases that would require Private Mortgage Insurance (PMI) that they don't want to hear about, use a self insurance product with it's higher loan rates, or they will need to add a second mortgage to keep from having PMI. 

Many find they are up-side-down in equity and might even have to bring hundreds, if not thousands to the table (even on a true zero point quote) just to refinance it. I recently had a prospective customer that was so buried they couldn't even sell the home without bringing over $6,000 to closing. You know that made their day.

Okay, that neg-am payment looks GREAT! But, understand the potential risks. Relying on fast equity growth through appreciation to bail out of these and other quick-fix products by refinancing is at least temporarily a dream in many markets today. It could get worse if the market keeps going south.

7/2/2008 UPDATE 1 YEAR LATER! These loans have proven to be GARBAGE! Neg AM, High payments, driving people into foreclosure or terrible debt payments for years to come! I have never sold one. But I can't tell you how many people thought I was crazy for not doing them.

Bill Wilbanks /  www.OrlandoMortgageMasters.com