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For years, when someone wanted to purchase or refinance a home, the choices were simple. The buyer chose either a 15-year fixed-rate mortgage or a 30 year fixed-rate mortgage. That was it. Of course, those were also the days of twenty percent down payments, which seriously hindered the ability of many Americans to obtain the loan necessary to buy their own home. In recent years, more flexible loan types have become available and down payment requirements have been relaxed. There are now far more choices of loan types available for the borrower than ever before. That can be a mixed blessing, however, as prospective borrowers now have to do a tremendous amount of homework in order to determine which type of loan might be the best choice. The selection of loan types that are currently available can be quite bewildering, and the wrong choice could cost the prospective borrower thousands of dollars over the term of the loan.
The standard 15-year and 30-year mortgages are still quite popular. Each provides the stability of a fixed interest rate and a payment that will remain the same throughout the duration of the life of the mortgage. When interest rates are near historic lows, as they are today, these traditional choices work well for most buyers. Buyers who find a 15-year or 30-year mortgage to be within their means would probably benefit from obtaining such a mortgage now.
In recent years, as home prices have increased faster than wages, the lending industry has created more flexible types of mortgages designed to help buyers who may have trouble with traditional loans obtain financing. These types of loans tend to have adjustable interest rates:
# The Adjustable Rate Mortgage, or ARM, has a rate that adjusts over time as spelled out in the mortgage agreement. Typically, the rate at the time of singing the loan is lower than that of a traditional mortgage, perhaps by one percent or so. The difference is that the rate can adjust over time as the market changes. The loan agreement will spell out how often the rate may change and how much the rate may change at one time. The agreement may also indicate a maximum interest rate that may be charged over the life of the loan. These types of loans are ideal for buyers who do not intend to stay in their home for more than a few years, or buyers who are purchasing in times of high interest rates, when there is an expectation that rates will drop over time.
# Convertible mortgages are ARMs that offer the buyer an opportunity to “convert” the adjustable rate loan to a fixed rate loan after a certain period of time that is spelled out in the loan agreement. There is a fee charged for converting the mortgage, but the fee is typically less than the fees associated with refinancing the mortgage altogether.
# Two Step mortgages offer an initial rate that is lower than the rate for fixed-rate mortgages for the first few years of the loan. After a set period of time, the rate increases to a fixed rate. This allows buyers to pay less during the early years of their loan, when they may earn less or need extra cash for home furnishings. The disadvantage of this type of loan is that the increase in the interest rate can be substantial, and may make the payments unaffordable for some buyers..
These are just a few of the types of loans that are currently available in the market. There are probably dozens of variations on ARM loans, and prospective buyers should study their options carefully before agreeing to a loan. Making the right choice could save buyers thousands of dollars over the life of the loan. Making the wrong choice could leave buyers with a loan that they cannot afford to pay. A little time spent on research is time well spent.
The booming real estate market has allowed many Americans to become “equity rich.” They may not have a lot of cash on hand, but they might have equity in their homes worth several hundred thousand dollars or more. Unfortunately, this increase in home wealth has spawned an equally booming business in equity theft, as more and more thieves find increasingly clever ways to con homeowners out of their equity, their homes, or both. One clever new scam involves companies that promise to completely “eliminate” a homeowner's mortgage. For a fee of a few thousand dollars, these companies claim that a homeowner can have a free and clear title to their home without paying off the remaining debt. How does this scam work?
This scam is a bit more complicated than other scams that often use simple forgery of identity theft. In this “mortgage elimination” scam, the homeowner places his home in a trust with the mortgage elimination company as the trustee. The trustee files a long, tedious, frivolous, letter of complaint with the mortgage company, giving them a mere ten days to respond. Should the mortgage company not respond within ten days, and they frequently do not, the trust claims that they are then free of the mortgage obligation. Using a questionable power of attorney procedure, the trust then files with the local register of deeds for a release of the home's title. This makes it appear that the home is now owned without a lien.
The legalities of this range from murky and questionable to outright fraud. It gets even worse when the trustee, claiming clear title to the home, takes out a home equity loan, cashes the check, and promptly disappears. The resulting mess often leaves the original homeowner with a pile of lawsuits, numerous visits from the police and the obligation to pay two mortgages. This scam is currently going on only in certain parts of the country, and isn't yet widespread. Homeowners can easily avoid being taken by this scam by simply recognizing one simple truth – you cannot simply waive a mortgage obligation away without paying off the loan. Remember, if it sounds too good to be true, it is too good to be true.