The combination of rising interest rates (although still historically low) and rising home prices has caused the robust mortgage market to slow from its record pace. This has motivated lenders to either introduce creative new loan products or to more aggressively market existing products. If you have not shopped for a second mortgage in a while, you will find numerous new products from which to choose. Following is a brief review of some of the new and popular products available today.
Interest Only With this loan program you are paying only the interest on your mortgage and are not paying any principal. This reduces your monthly payments and can allow you to afford a larger home or save more money on a mortgage refinancing or home purchase loan. If used carefully, you can also free up cash flow that can be used for investment purposes or to pay down high interest rate debt.
Negative Amortization These are often marketed using the phrase “option arm” or “choice mortgage”. With this loan type, your payment does not cover all of the monthly interest. Often, your mortgage balance is increasing and the underlying interest rate is usually a monthly variable rate. These loans are used to dramatically reduce your monthly payment and can be used for a mortgage refinancing or home purchase. This program should be reserved for the more sophisticated borrower and it is important that you understand the terms of the loan.
40 Year Amortization Rather than paying off in 30 years, this loan pays off in 40 years. As with the Negative Amortization and Interest Only, this program is used to reduce your monthly payment.
Stated Income / Reduced Income Documentation Loans There are a variety of these loan products available, but they are primarily used to for individuals with difficult to verify income. These can be used for mortgage refinancing, second mortgages and home purchase loans. As lenders have become more comfortable with credit scoring, these products have become very popular. Essentially the lender is relying on the credit score for their loan decision. They realize that borrowers with higher credit scores will pay their mortgage and they do not need to fully verify their income.
ALT A Programs The “ALT” is short for Alternative and the “A” refers to the borrower category. These are categories of mortgages that fall outside the more stringent guidelines of Fannie Mae and Freddie Mac. Generally these mortgage refinancing programs allow for more flexibility with regards to loan to values and income documentation requirements and can be used for home purchase, mortgage refinancing and second mortgages.
Hybrid Second Mortgages Traditionally, your options for a second mortgage were either a fixed rate, fixed term loan or a variable rate, open ended line of credit. Now, you can have the benefit of both. You can start your second mortgage as a variable rate home equity line of credit and then lock in all or a portion of it to a fixed rate for a fixed number of years.
Bob Peckenpaugh is a professional mortgage planner with over 15 years lending and banking experience. His programs assist clients with increasing cash flow, reducing liabilities and building equity by integrating a clients mortgage decision with their overall financial plan. He is a manager with CFIC Home Mortgage providing both purchase and refinance transactions. Bob holds a B.S. in Marketing and Management and is Fair Credit Reporting Act certified. For additional questions or comments about Mortgage Refinancing or Second Mortgage Solutions, please contact Bob Peckenpaugh at American Mortgage Funding Corp or robert.peckenpaugh@branch.cfic.com or 1-800-943-9472.
