As published in Scotsman Guide's Residential Edition, November 2005.
Today's consumers are more aware of and more comfortable with their mortgage options than they were 10 years ago. Primarily, this is because of a deepened understanding and greater education provided by the Web and brokers. Borrowers are seeking more flexibility, control and self-determination in their loans. In turn, this has turned more attention to interest-only and payment-option-ARM loans -- loans that can negatively amortize.
Whether the products are used for first or second mortgages, the rise in popularity of interest-only and pay-option ARMs is a result of borrowers' alternative mind-sets and greater knowledge of their potential options. Borrowers are taking control of the amortization of their loans. They are saying they do not need the bank to amortize their loans; they're perfectly comfortable doing it themselves. Calculating prepayment impact is no longer a black box with the industry's latest Web sites and other tools.
Homeowners also are becoming more financially savvy. The large debt loads that many consumers carry have forced them to develop a degree of financial understanding and sophistication for new solutions.
How they work
Although many critics look at interest-only and payment-option-ARM loans as "creative" and dangerous, mortgage professionals must understand that any loan product can be misused. As the loans gain attention, all parties are realizing the need for additional education on how these loans work.
Interest-only loans do not differ much from traditional loans. In most cases, they have more-stringent qualifying requirements than other loan types. Interest-only first mortgages have been around for a long time, and consumers, investors and bankers have warmed up to the benefits of lower payment options.
One reason for the rising popularity of home-equity lines of credit (HELOCs) is the interest-only payment flexibility. Whether the loan is a first or second mortgage, homeowners are looking for flexibility in their loans so that they're not locked into the same payment responsibility every month for the next 30 years.
Borrowers have comfort knowing that if they run into a tight month, they have the option to make an interest-only payment. Even if a homeowner must make just the interest-only payment for an extended period, the power in flexibility is proving more important than paying down the principal each month.
Interest-only and payment-option-ARM loans allow brokers to offer value to customers beyond the loan's rate. For example, customers may come to a broker wanting a lower rate or to consolidate debt. These products would enable the broker to deliver additional benefits that customers did not anticipate and to further educate them on the process. With these programs' flexibility, brokers position themselves as a better resource to their customers. Furthermore, as consumers become savvier about their options, they will expect brokers and lenders to offer these adjustable-rate-mortgage products.
Page: 1 2 3 Next