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Working With A “Salesperson” Can Be A Costly Mistake November 15, 2006

Posted by Jay Medina in Informative Articles and Free Reports.

My wife forwarded me this article, and I wanted to share it with you.  The dangers highlighted in this article can be avoided by working with a true Mortgage Consultant.  A Consultant is someone who will advise you and help you reach your goals and help you get ahead… and not be a “salesperson” by pushing what they think you should have.

And although it talks about Texas, the same holds true just about anywhere in the U.S.

The article is below:


Texas attorney general warns of ‘exotic’ mortgages
Henderson Daily News           11/14/2006

Want a $350,000 loan for $750 a month? Impossible, you say?

Some unscrupulous lenders have offered those types of “exotic” loans to people who were unqualified for more conventional loans and some unsuspecting homebuyers have fallen for it.

Although this may first appear to be a very attractive loan with very low monthly payments, Texas Attorney General Greg Abbott has issued a warning to prospective home buyers.

These offers, also known as “exotic” mortgages, might be the solution for some consumers, such as those who want the convenience of low payments initially and can afford substantially higher ones in the long run. But for those who are not fully aware of the terms, they could quickly find themselves in a bind, Abbott warns.

“Most of these low-ball offers are for interest-only loans,” Abbott said. In the example above, the $750 monthly payment will likely serve to simply pay off the interest that is accumulating, and that’s assuming the loan was extended with a very low interest rate.”

In interviews with local realtors and banking institutions that finance home mortgages, the Henderson Daily News found that such “exotic” loans are not being offered locally.

Cecilia Johnson of Heritage Realty echoed sentiments expressed by local realtors when she said, “Usually when we have a buyer we ask them if they’re working with a lender. Most people have had some experience with either lenders or mortgage brokers and they have people they’re already working with. If they don’t, we let them know of a good variety of lenders who are local or in our area, either in Longview or Tyler. Then they have a good selection to choose from, people that they might want to use.

“Sometimes there are folks that want to use the adjustable-rate mortgages because different lenders, and they are all different, if you don’t put 10 percent down – maybe you only put 5 percent down – then you don’t qualify for fixed rate and you’ll get an adjustable rate.

“And that’s a good avenue for folks to get into a house if they don’t have the big down payment – to put less money down and get an adjustable rate. But I find that most of the loans that we do are fixed rate whether it be conventional financing or FHA financing. Most of them are fixed.”

In a telephone interview with Johnny Foster, president of Henderson Federal Savings Bank, one of Henderson’s leading mortgage lenders, said, “No, we do not do the ‘exotic’ mortgages. We do offer fixed-rate and adjustable-rate mortgages.”

Explaining when and why people choose fixed rate or adjustable rate, Foster said, “We have more fixed-rate mortgages. When rates are low, people tend to go with fixed rates. As rates go up, adjustable rates become another option for them because they can normally get in at a lower interest rate and lower payments.”

Foster’s statement mirrored opinions offered by other local banking and lending institutions. Foster said his association has not seen any increase in foreclosures recently.

There is a big difference, however, between adjustable rate mortgages and the exotic mortgages about which Abbot warns.

Exotic mortgages sometimes have starting rates as low as one percent. Consumers can rest assured, however, that the low rates are for a limited time.

After a few payments, they rise to prevailing market offerings, based on the consumer’s credit score and other factors.

If interest rates rise, then the $750 monthly payment will serve to pay off only part of the interest and still does not touch the principal.

The unpaid interest usually becomes part of the mortgage itself. In time, the mortgage grows, and it is likely that after a couple of years of making low payments, these will be adjusted to reflect the rising interest and the growing mortgage. That rise could be substantial, doubling or even tripling payments. Unless the consumer begins to make payments that cover the accumulating interest and pay off the principal, they can find themselves in a cycle of accumulating debt. This also means that they will likely not build equity, the difference between the value of the home and how much is still owed on the mortgage, which will make it very difficult for them to sell the home.

To put it in perspective, for most 30-year mortgages with a competitive interest rate, the monthly payments, including insurance and property taxes, equal about one percent of the value of the home. That means that for a $350,000 home, that payment would be somewhere around $3,500 a month. Offering of that size for only $750 a month is simply unsustainable in the long run.

This leads to a high rate of home foreclosures and a bad credit rating that might prevent future home buying.

Anyone in the market for a home would do well to consult with an independent professional, such as an attorney or licensed real estate expert, to guide them through the process and explain, in detail, the terms being offered and the long-term impact, Abbott said.



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