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Posted by Steve on February 12, 2006, 9:16 am
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I am from the UK and
I am buying a new home in Florida. Its not a rental/tourist type thing its
for our own use.
The builders offshoot mortgage company are hoping to provide the mortgage.
I am not keen as I am skeptical about this type of arrangement.
Anyway, what they are offering is a pick a payment mortgage.
My rate is 2.6% for the first year and it raises by 75% each year. I can opt
out any time and only get charged $200 to go to another package.
Alarm bells are ringing and I have asked loads of questions in relation to
it. Still waiting for answers. In the meantime, does anyone know if this
type of mortgage is any good.
Thanks
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Posted by Jeff Strickland on February 12, 2006, 3:37 pm
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<top post>
The Pick-A-Payment mortgage is easy, you have to decide if it is good for
you.
It allows you to select any of four (some offer three) payment options every
month. You can select the lowest possible payment that carries baggage of
having a Negative Ammoritization, an Interest Only payment that pays all of
the interest that accrues during the past 30 days, a 30-year payment or a
15-year payment. These last two options will retire the loan in either 30 or
15 years, and some pick-a-pay programs don't offer a specific 15-year
repayment option, but you can ALWAYS add money to your payment and repay the
loan earlier than 30 years.
The risks of this loan are that you elect to consistantly pay the minimum
payment, and your mortgage balance actually grows. When the mortgage has
grown to 125% of the original balance, you will be forced to refinance,
and/or the Minumum Payment option will be taken off the table. You can elect
to make the Interest Only payment for as long as you want, but the result of
this option is that you loan is never repaid. It doesn't grow, but it also
doesn't go down. If you think the housing market is rising, and you don't
plan on staying here more than a few years, then the interest only payment
makes sense. Another risk is that the loan is an Adjustable Rate Mortgage
that can be based on any of several indices. Once the loan is arranged, the
index can not be changed, so you need to look at the index they are using,
or several of the indices if there are options, and see how it compares to
others in terms of volitility. The LIBOR is the lowest index right now, but
it probably the most volitile. The CODI is weighted by the past 12 months,
so a spike upwards (or downwards) is weighted by the other monts of the
year, making large movements in either direction impossible.
The 7.5% increase (you said 75% in your post, but the real number is 7.5%)
applies to the Minimum Payment only. If your minimun payment is $1000 now,
then next year it will go to $1075, then $1156, and so on. It will actually
be a bit different (higher) because it is based the outstanding balance when
the payment is due, but it won't be hugely different.
If you plan on living in the unit for a reasonably short period of time, the
mortgage you are looking at should work out okay. It is an ARM though, and
this should raise alarms in your head. I have this loan on my house, but I
have no problems in my mind to refi in a couple of years, and the value of
my house is considerably higher today than when I took the loan out. I'd
have to loose significant value before I couldn't refi, so I'm okay with the
risk/benifit picture. Your ability to manage the possible pain may be a
speed bump -- or a brick wall -- to you for getting this loan, but there is
no smoke-and-mirrors magic going on. This kind of mortgage is a standard
financial tool that you can use. Is it the right tool for you? Only you can
answer that one.
Another tool -- one that I think makes lots of sense to the right
borrowers -- is a Home Equity Line of Credit 1st Trust Deed. With this loan,
you deposit 100% of your income to your house payment to lower the Average
Daily Balance, then write checks to pay for stuff -- EVERYTHING -- with
checks that come tied to your mortgage.
Let's say you make $5000 per month, and have $2000 in various payments and
bills -- cars, utilities, food, etc. Your entire income goes to pay down the
mortgage by $5000 for something on the order of 15 days, then you pay bills
and go to the market and add $2000 back to the mortgage. The net result is
that your Average Daily Balance is much lower than the standard mortgage
plans, and an added benefit is that all of your expenditures now become
mortgage interest and can be deducted from your income taxes. You need a 740
FICO score to qualify for this loan, and a huge benefit is that any equity
that you build in your home is immediately available to you just by writing
a check. If you are in the habit of spending on crap that has no real value,
then you are not likely to have the FICO score that is required, but if you
have the FICO socre then you should see the value that this kind of program
offers.
</top post>
>I am from the UK and
> I am buying a new home in Florida. Its not a rental/tourist type thing its
> for our own use.
> The builders offshoot mortgage company are hoping to provide the mortgage.
> I am not keen as I am skeptical about this type of arrangement.
> Anyway, what they are offering is a pick a payment mortgage.
> My rate is 2.6% for the first year and it raises by 75% each year. I can
> opt out any time and only get charged $200 to go to another package.
> Alarm bells are ringing and I have asked loads of questions in relation to
> it. Still waiting for answers. In the meantime, does anyone know if this
> type of mortgage is any good.
> Thanks
>
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Posted by Steve on February 14, 2006, 4:22 pm
Please log in for more thread options Jeff
Many thanks on an informative reply.
Steve
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Posted by Jeff Strickland on February 15, 2006, 11:29 pm
Please log in for more thread options You're welcome. What do you think you might do? Do you have any other loan
scenarios that you would like to understand?
You understand how ARMs work, don't you? They're tied to an index that
floats up and down, and there is a margin that is fixed. Add the index and
the margin to arrive at the rate. For example, the index is 2.35 today and
the margin is 3. Your rate at that time would be 5.35. If the index moves
down, the rate goes down, if the index goes up, the rate goes up. No matter
what the index does, the margin is a constant that that never changes
through the life of the loan.
Do a web-search on CODI (Cost of Deposit Index) or COSI (Cost of Savings
Index). These should give you charts that describe what each index has done
through history, and compare some of the other indices at the same time. The
CODI is much the same as the Cost of Funds index (there are CODIs for each
of the financial districts within the USA, my district is the 11th
District). The CODI is, in short, the cost of banks to service their deposit
accounts. COSI is a unique index used by World Savings. It describes World's
cost to service its savings accounts. The CODI is a larger base of data than
the COSI, but the view of the world is essentially the same. That is, they
are the same index but on different scales. (They really are a bit
different, but the differences are not really germaine to the discussion.)
The LIBOR (London Interbank Overnight Rate) is the rate that banks charge
each other to loan money back and forth to each other. It is roughly the
same as our Discount Rate or Prime Rate. The Prime Rate is nothing more than
the Discount Rate + 3.
> Jeff
> Many thanks on an informative reply.
> Steve
>
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