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Bad Mortgages? Lenders Are The Key

Getting caught up in a mortgage that commits you to a loan without fixed payments is one of the many ways to make what would seem like a great investment turn into a disaster. Many homeowners, particularly in the past few years have bad mortgages. Lenders have less incentive to adjust these loans if the payments are being made, regardless of the effect on a homeowner and his family.

Getting into loans that often sound great in the beginning when you are shopping for a loan is easy. You have a home picked out and everyone is excited. The closer you get to commit to a property, the less your brain works to the see the bigger picture. Home ownership is one thing, but a bad mortgage is with you for a long time.

It has happened many times. After searching for different rates from various lenders, you mortgage broker finds you a really great deal. That’s what he is supposed to do. But if he or she puts you into a loan that is either an ARM or one that has a prepayment penalty, then making adjustments as rates come down, which they eventually will do over the course of the next 30 years, can cost you a lot of money and headaches.

But you really can’t blame the broker. He doesn’t make up the terms for mortgages, lenders do. They put together different types of loans that make it easier for someone to qualify for, but often leave them high and dry in the long run. For the lenders, it’s all about filling their portfolio.

Here are some other types of loans that you need to be especially careful about when looking over the loan details.

• Sub-prime. Obviously not a prime loan that a bank would love to put on their books. Because it’s below the ideal standards that a lender requires, the points, interest rates, terms, and other conditions are more stringent and less to your advantage.
• Adjustable Rate Mortgage. This is the biggest sucker bet on mortgages. The borrower starts out with a lower rate than current market conditions in order to be able to qualify for a larger loan. When the rates are adjusted after a year or two, depending upon the terms, monthly payments go up – way up. Chances are if you can barely afford the payments on this type of loan now, don’t expect a miracle by next year where it will cost you even more.
• Private Mortgage Insurance. This is similar to an ARM in the sense that the borrower does not have enough money for a down payment and the lender reduces the down and takes out insurance so that if the loan defaults, the lender gets paid the amount that it was insured for. If you need PMI, then chances are that you can’t afford the loan and should reconsider.
• Pre-Payment Penalty. This usually applies to an ARM or a second mortgage in which you must pay a penalty if you pay off the loan earlier than the state terms, in most cases two years.
• Zero Down Loans. Unless you have income above and beyond what is required, stay away from this type of loan. Generally it means that the property is valued far more than the loan. If that is the case, you just need to ask yourself why. If the value is less, then why isn’t the selling price equal to market price?
• Balloon Payments. Unless you have a source to finance or at least another asset to help with the balloon when it is due, this could spell disaster. Market conditions and interest rates change constantly.
• LTV. The Loan To Value is the basis of all loans. Anything above 80% for a conventional mortgage will require PMI or a second mortgage which could cause problems, particularly if the second is from the same lender and is an ARM. Check carefully when you don’t have the 20% down payment.
• Acceleration Clause. Lenders will often throw in this clause which basically says that they can ask for payment in full at any time that the loan terms and conditions are not met in full. Read it carefully.

There are many good lenders who are willing to work with borrowers without enticements that exceed their ability to pay in the future.