Structure Your Mortgage According To Market Conditions

By: Chrisjan Smith

Just over a year and a half ago the real estate market in the United States was red hot and setting records all around the country. It is now coming to a screeching halt. There are a variety of reasons like interest rates that are increasing and also the affordability for the average family that is no longer there. Most experts agree that the slowdown is more than just a passing trend and will continue for at least the next number of years.

With this slowdown in the market, loans that seemed like a great way to save some money up front are now proving to be a bad decision. If you locked yourself into a fixed rate 15 or 30 year mortgage you will be fine during this market correction. If you have an interest only adjustable rate mortgage (ARM) you may be are in a very tenuous position.

Real estate investors were using interest only ARMs to help them turn a quick profit, the practice is also known as flipping. This gave an investor a few years of relatively low monthly payments so they could use their capital to fix the home up.

Unfortunately what happens with an interest only ARM is that not one cent goes towards the principle of the home and no equity is gained. Depending on which type of ARM you have, after three or five years your payment increases so that you begin to pay some money towards the loan's principle.

Most investors didn't worry about the fact that none of their payment was going toward the principle because home prices were rising so quickly that the market itself was adding to the equity of their home. With the slowdown that is no longer the case, in fact they may find that after making five years of payments they don't have any more equity in the home then they did when it was first acquired.

Many people that have purchased a home that they couldn't really afford used the Option ARM. The Option ARM allows the home owner four ways to pay the monthly payments. You can do the minimum payment option, the interest only option, or you may chose the payment plan that has an amortization schedule to get you paid off in 30 years, and there is also the 15 year payment option.

The worst option you can choose is the minimum payment option. This option is very misleading, it gives you a very low monthly payment, but none of the principle is touched and it does not even cover the monthly accrued interest. If fact, if you were to only make the monthly minimum, the next month you will actually owe more than before you made the payment.

The market has now changed and you should re-evaluate your home mortgage. If you have an ARM or the Option ARM, check with your lender and see what it will take to get you into a fixed rate 15 or 30 year mortgage.

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