Home Loan Info

By Bob Roscoe

The fixed rate mortgage offers the certainty of a constant monthly payment, but an adjustable may seduce you with its lower payment. Security or affordability? Which do you choose? Just what is a home buyer to do?

Which loan you eventually choose may depend more upon your personality than a careful analysis of each loan’s advantages and disadvantages. People who generally seek security in other areas of their lives, such as occupations and relationships, will often opt for the security of a fixed rate mortgage. Those who are more adventurous will sometimes respond to the lure of an adjustable.

The attractions of a fixed rate mortgage are a principal and interest payment and an interest rate that remain the same for the entire length of the loan. That stable predictability is what entices so many people to choose it, and its safety and reliability will afford the homeowner peace of mind. You get your fixed rate mortgage and you forget about it. What could be easier?

An adjustable rate mortgage or ARM, on the other hand, is generally the opposite. An ARM usually has an interest rate and a monthly payment that are fixed only for a specific period of time, after which both rate and payment will adjust periodically.

The ARM’s initial low rate and monthly payment are its appeal, and it can offer that because its rate is based on the short term bond market while a fixed rate mortgage is pegged to long term bonds. The short term bond market generally features lower rates than the long term market. If you believe that interest rates will decrease by the time your mortgage rate begins adjusting, then the lure of an even lower rate and payment down the road may tempt you even further.

The foreboding most people have with the ARM involves its uncertainty. An element of fear is introduced because your rate and payment might increase once the rate starts to adjust. If interest rates in the bond market are higher once adjustment does begin, then your rate and payment will increase. None of us wants payments higher than they need to be, but some of us shrink from the risk more than others do.
 
But much of that risk aversion is needless hand wringing. Here’s why.

By deciding which ARM you prefer, you are also choosing the initial time period you want the rate and monthly payment to remain fixed. ARMs generally offer the following initial fixed time periods: one month, three months, six months, one year, two years, three years, five years, seven years and ten years. The shortest time periods will offer the lowest initial rates. A one month ARM may provide for a rate and payment guarantee of just one month before adjustment begins. A one year ARM is fixed for one year and then the adjustments start. A three year ARM is fixed for three years, and so on.

By picking a time period that best fits you and your situation in life, you can take advantage of the lower rate and monthly payment that an ARM provides at a substantially diminished risk. If you are a first time home buyer, for example, then a three year ARM might make the most sense because first time home buyers often stay in their home for only three or four years. Why get a 30 year mortgage if you won’t be in the home that long?

If you are middle age and your children are at the point in life where they go off to college or trade school, statistics suggest that they will soon move out and you will become an empty nester. Empty nesters frequently downsize to a smaller home once their kids depart, which means a different home and yet another mortgage.

The point is that our lives change frequently and predictably. We get married, have babies, relocate, get divorced, remarry, get sick, grow old, retire and die. All of these chapters in our lives will often occur in a span of only 30 to 40 years. When these joyous and not so joyous events arise, sometimes without warning, our housing and mortgage needs will oftentimes shift just as suddenly. Yet most homeowners rarely take such life events into account when choosing their mortgage.

The average mortgage lasts only about five years, sometimes because a major life event sprouts up inducing the homeowner either to move or refinance. Other times economic change may cause mortgage rates to drop, which, in turn, may influence people to enact changes themselves. They either refinance or perhaps decide that it’s an affordable time to invest in other housing. Despite all of this, people predictably embrace the 30 year fixed rate mortgage rather than an ARM because of the warm and fuzzy sense of safety that a fixed exudes.

The choice is yours to make. An informed decision will include considering all of the alternatives with the knowledge that your personality traits may be influencing your decision making process. While statistical analysis will often favor choosing the ARM, there is nothing wrong with selecting a fixed rate loan.

Copyright 2006. Bob Roscoe. All rights reserved.

Bob Roscoe, Mortgage Marketing Associates, Minneapolis, Minnesota

Loan Secrets 

By Bob Roscoe

Kenneth Harney, a highly respected columnist for the Washington Post, expresses surprise in his column recently because home buyers in high-cost parts of the country like California, Hawaii, Boston and Washington, D.C. are not leading the nation in mortgage delinquencies.

Mr. Harney states in near amazement that the opposite is actually true–that home owners in the high-cost areas of the nation have the lowest mortgage delinquency rate. The Mortgage Bankers Association of America, which recently released its latest survey on delinquency rates, states that Hawaii has the lowest mortgage delinquency rate in the nation at only 0.89%, followed by California at 1.02% and Virginia at 1.32%.

These numbers are contrasted by the states with the highest delinquency rate: Mississippi at 8.5%, Louisiana - 6.7% (pre-hurricane Katrina numbers), Indiana - 6.66%, Tennessee - 6.32%, Texas - 6.31% and Ohio - 6.13%. Notice that most of the high delinquency rates occur in states with a lower than average per capita income. Mississippi and Louisiana have some of the lowest per capita incomes in the nation. Hawaii and California, on the other hand, have some of the highest.

You could read more about the numbers in his column at the Washington Post, but that newspaper requires you to sign-in and become a member just to read its articles. An easier way is to go to The Wichita Eagle (as in Wichita, Kansas) where Harney’s column is reprinted without the signing-in hassle.

While Harney doesn’t explicitly state that he expects the high cost areas to lead the country in mortgage delinquencies, the tone of his column highly suggests that. Harney’s recent columns have made no secret of his belief that home owners in the U.S. are overextending themselves because they are taking out more interest-only mortgages and other non-traditional type of mortgages to finance their home purchases and refinances. His implied expectation is that folks with these types of loans will be the new wave of foreclosures to hit the nation.

Actually, the opposite is true. Anybody with any long term experience in the mortgage or real estate industries will be able to tell you that higher cost does not equal more frequent mortgage delinquencies. Both mortgage delinquencies and foreclosures are usually the result of loss of income. Alcoholism, drug addiction and gambling addiction certainly are factors, but the number one reason people cannot pay their bills is because they are earning less money than they used to.

Every economic downturn produces a new wave of foreclosures, and the next downturn should be no different. This next time around, however, the pundits that predicted the crash of the so-called “real estate bubble” will be telling anyone who will listen that they told us so. They will equate the up tick in foreclosures with the popping of the “real estate bubble.”

They will be wrong.

Foreclosures and mortgage delinquencies follow the economic cycle as sure as sunrise follows sunset. Folks who are laid off their job or are the victims of downsizing are usually the ones who experience difficulty paying the mortgage. I have helped many clients avoid foreclosure, and the constant recurring theme I see with the vast majority of those people is loss of income.

It’s time that the media stopped trying to create the news rather than simply to report it. All of the media hype about an impending bursting of a “real estate bubble” is mere conjecture. Most of those who believe that the bubble will burst believe it because the media has harped on it so much. If you hear almost anything long enough and often enough, you begin to believe it. It’s the underlying principle of today’s advertising. For most of the U.S., the “real estate bubble” will not burst.

It will merely hiss a bit.

Copyright 2005 Bob Roscoe

About the Author

20 years of industry experience has given Bob an eye for detail lending him an expertise which ensures that mortgage transactions will flow smoothly. “Stress free” is Bob’s hallmark. Learn more at Mortgage Marketing Associates & Name That Value.