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Mortgages : Are you being led down the wrong path?

By Jeff Belonger

Mortgage and Lending with Social Media - Infinity Home Mortgage Company, Inc

June 03, 2007 03:39 AM

hole

Buy a house for $200,000 and pay $643 a month. WOW...... This is a win win situation. But wait, did you know the name of this type of mortgage program? It's called The Pay Option Arm : But when advertised, lenders state...."Get the lowest payment!!" But BEWARE......

Many of us know that advertisements are to get you interested, to call. Making it sound like the next best thing to gold. Remember the Gold Rush? It sounded great. But many people lost their lives in search of the ultimate dream of getting rich. In regards to this program, the ultimate goal of the consumer? Getting the lowest mortgage payment possible. Please read : Rate vs Payment

Lately, there have been a string of advertisements talking about these ultra low payments. Quicken Home Loans just came out with one called the Secure Advantage. DiTech, who is owned by GMAC mortgage, has a commercial telling you to call on the same type of mortgage mentioned above, with the same payment. These are all the same types of loans that can be found with any lender. The question is, are they leading you down the right path? Are these lenders leading you into a dark and lonely tunnel with no light at the end.

money

Now, don't get me wrong. This is can be a good program, but it's not for everyone. You need to understand all of the ins and outs of this program. With rates being so low, you can get better security with a fixed rate. This program is for those that will take the difference in the low payment and apply it towards other investment opportunities. Financial opportunities :

-- stocks and bonds that give a much higher return.

-- taking the difference and buying investment properties

But this generally won't happen because the average consumer needs that lower payment so they can afford that larger house. Basically living beyond their means.

Just be careful. I say this because I am dealing with a client in Florida now that is trying to get out of this loan. She told me that she was pressured into this loan and the end result was that the lower payment did look interesting. In which this case was her deciding factor. Sure, she was given each disclosure to be looked over. But don't you as the consumer come to us, the mortgage professional, because we should be looking out for your best interest? The answer should be YES. But this is not always the case. Greed can be a powerful thing. In this women's case? She is now seeing her payment go up and her mortgage principal also go up. Here is another good read : Purchase Price vs Payment. what's missing??????

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Leo Namiot - LeoLends.com

Canopy Mortgage - Leo Namiot - Saint Augustine, FL

More than just great rates

This is a dangerous project unless the borrower(s) 110% understand it, otherwise strong "Do not recommend"

Jun 03, 2007 03:43 AM

Christy Avila

J and C Realty - Yucaipa, CA

I beleive that is the lenders responsibility to explain fully to the client the terms of the loan they ar ereceiving. i know that the consumer should read the paperwork but honestly do they understand what they are reading?

Jun 03, 2007 03:50 AM

Phillip Tucker

Tucker Realty Inc - Clarksville, TN

Yeah I never thought of people that would take that money and put it in stocks. It mostly people looking for something to good to be true and will be finding out how screwed they are in a year or two.

Jun 03, 2007 03:53 AM

Jeff Belonger

Social Media - Infinity Home Mortgage Company, Inc - Cherry Hill, NJ

The FHA Expert - FHA Loans - FHA mortgages - USDA loans - VA Loans

Leo.... yes, it can be. I did this more as an awareness to the general public. Unfortunately this was a post that should have been plastered all of the net about 2 to 3 years ago. I am sure you know that this was when everyone was jumping onto this so-called money train. Both lenders and consumers.

Christy..... I totally agree, hence why I wrote this. I am getting tired of these commercials on TV, just to get the client to call, thinking that this is too good to be true. Yes, the paper work can be too confusing at times and I do blame the lending industry for not being professional about this. Knowing damn well that if they explained this 110%, that about 50% of these borrowers would not go through with this type of loan. Thanks for your feedback.

Phillip.... again, I agree.... lenders make this look too good. Many of us know that if it's too good to be true, usually.... not always... but usually it's not good. At least on how this loan is explained and advertised by so many.

Jun 03, 2007 04:01 AM

Joe Adams

Major Mortgage USA/Branch Manager - Montrose, CO

Teaser rates and the sub prime mess....... The Option Arm is a program ONLY for those that truely can undersatnd, as for the loan officers in my branch we do not even price an option arm unless the client ask for it by name.

Jun 03, 2007 04:09 AM

Eric Bouler

Gardner Realtors, Licensed in La. - New Orleans, LA

Listening to your Needs

You cannot keep people from being hurt by themselves. The generation behind me did not have parents tell them about the depression and how hard it was to get $5. it was taught in the Church, school and at home on how to handle money. Today its a different story. There is something to say conservative values. We were promised great schools with the lottery!!! Has that happened?

This is off your subject but I think Americans need to look at themselves. Then I am from a red state in the South.

Jun 03, 2007 04:56 AM

Missy Caulk

Missy Caulk TEAM - Ann Arbor, MI

Savvy Realtor - Ann Arbor Real Estate

Jeff, contracts are so confusing to people who don't read them everyday. Yes, our clients do look up to us and need it explained in simple English what it says.

Jun 03, 2007 06:05 AM

Jeff Belonger

Social Media - Infinity Home Mortgage Company, Inc - Cherry Hill, NJ

The FHA Expert - FHA Loans - FHA mortgages - USDA loans - VA Loans

Joe.... my overall thoughts and or opinions on this. Misleading the general public... bait and switch.... advertisements making something look great, when everything else is disclosed in small words. It's called better education to the client..... educating them and not selling a loan type based on profit for the lender. Thanks for your feedback.

Eric..... I agree.... but we can certainly try, educating them. I do understand that our parents were on their own for the most part. But today... we just have too many sales people that just don't care. Bottom line.... thinking of that almighty dollar. And you are right, these types of values start in the homes, within family, school, and churches. thanks for your input.

Missy.... this is the problem. We know this and so many just say,TRUST me... or do you trust me? If yes, then just sign here. They should be able to trust us than get confused.... it's part of our job. But so many don't take the time to explain things. Especially when that program might not be that good for them to begin with.

Jun 03, 2007 07:33 AM

Rich Schiffer

Swarthmore, PA

Referral Agent, e-PRO

As I understand the Pay Option Arms, (Jeff, please correct me if I am wrong) they give the borrower the ability to decide each month what they are going to pay, with three typical options:

Regular Payment, Principal and Interest
Interest Only
Less than Full Interest

What most advertisements fail to mention, is that each time the borrower chooses option 3, the difference between option 3 and option 2 (the unpaid interest for that month) is added to the principal of the loan.

This is "Negative Amortization."

Yes, you pay a low price, but each month, your loan balance is going up.

There are a few situations when this can be appropriate, such as for a borrower whose cash flow is not predictable (like a Real Estate Agent paid on commission). Also, the negative amortization might not be a bad thing for someone who is improving the home and selling immediately ("Flipping"), since the improved market value should greatly exceed the original loan amount (presuming they planned the flip appropriately). Also, the negative amortization might not be a concern in a market that is rapidly appreciating. It will reduce the amount the borrower walks away with when they resell.

The danger with negative amortization is that if not planned carefully, and managed closely, the negative amortization can result in a short sale at the time of resale. In my opinion these type of loans should only be used by the most savvy of investors and homeowners.

Jun 03, 2007 02:36 PM

Mike Jaquish

Realty Arts - Cary, NC

919-880-2769 Cary, NC, Real Estate

The hardest sell I have gotten in years was from a mortgage broker pushing an Option ARM. After slamming through three or four of my puny objections, she made it clear she wasn't going to offer me anything else.

What ever happened to those three hundred programs she had in her satchel? Why is she no longer in the mortgage business?

Jun 03, 2007 03:10 PM

Susan Trombley

Trombley Real Estate - Wake Forest, NC

Broker/Realtor, Raleigh, Cary, Wake Forest, Youngs

I got into the real estate business, because I did not like not knowing what I did not know when I sold my first home and bought my second home. I did not like the agents I was working with. I was left in the dark and so I am trying to make the difference for my clients.

Jun 04, 2007 01:24 AM

Jeff Belonger

Social Media - Infinity Home Mortgage Company, Inc - Cherry Hill, NJ

The FHA Expert - FHA Loans - FHA mortgages - USDA loans - VA Loans

Rich..... you made some great points to why the Pay Option Arm is good. I just didn't want to list everything to make this post long. My basic point was to be very leery of these advertisements and what some loan officers will promise you.

ANd you are correct about the payments. In many cases, there are 4 payments. A 15 yr amortization also. This is where the loan officers get the clients to believe that this program has a fixed payment involved. Both the 30 and 15 yr. But they still aren't fixed. It's just based on a 30 year amortization.

Overall... you do bring up some great points to why this program can be good or bad. thanks

Mike.... this is the part that kills me also. Those mortgage companies or branch offices that just sell that specific type of loan. And it's ashame, because the average consumer doesn't know this.... but the Pay Option Arm is probably the most profitable loan for a lender to give to its client... making the quickest and easiest money. You make some great points based on this type of loan officer. thanks for your input & feedback.

Susan...... that's a good point. I guess I am even more leery of so many lenders and what they promise, because I have been a part of this industry for over 14 years. I hate to sound negative, but some of it really disgusts me, because this is usually the biggest investment in someone's life. Thanks for the input.

Jun 04, 2007 02:00 AM

Thesa Chambers

West + Main - Bend, OR

Principal Broker - Licensed in Oregon

Jeff - I truly am at a loss of how to make people understand that a low rate is not always the best loan product - so many ads focus on the rate - the public - mostly less experienced buyers think the rate is the key - when in reality the costs of the loan will kick the payment and true costs much higher than a rate that may seem a little higher - I save many posts by some of the lenders here on AR as tools to help these un-experienced buyers to understand it is not all about rates. Thanks of helping teach us and the public the truth of lending :o)

Jun 04, 2007 03:43 AM

Julia Fedak

Platinum Home Designs - Burlington, ON

IRIS, CSP

Thanks for the advice and confirmation..........this is what I try and tell my colleagues..........

i love(sarcastically said) the most recent comment from an agent...

the client said to the agent.."I can't afford over $500,000"....(the house was $599,000)...

the agent said.."Haven't you heard about the 40 yr ammortization?"

Uh, huh...the client is 40 yrs old.......want a mortgage at 80?

Julia

Jun 04, 2007 06:46 AM

Robert D. Ashby

Cruise Planners of South Florida - Plantation, FL

Providing Personalized Travel

Jeff,

I love DiTech's new commercial. IMHO, it should be offensive to every American out there.

Their new tag line is "People are Smart", yet they are simply repackaging a loan program and calling it their Equity Builder program. It amazingly resembles a bi-weekly mortgage program, at least in how fast you can pay it off.

Jun 04, 2007 07:32 AM

Jeff Belonger

Social Media - Infinity Home Mortgage Company, Inc - Cherry Hill, NJ

The FHA Expert - FHA Loans - FHA mortgages - USDA loans - VA Loans

Thesa..... we so much agree on this. And the consumer needs to be told the basics over and over. Yes, advertisements can suck people in. So can what their friends, family members, and neighbors tell the average consumer when shopping. But everyone doesn't realize this one main fact... each and every client is different from the next. Not one is alike. And thanks for your feedback and compliments.

Julia.... well, I don't have a problem if they are dragging out their mortgage 40 years. It all comes down to goals and not what age you will be when the actual term is over with. Again, it's called homeownership. And don't forget, the average person moves every 6 and a half years. These are my opinions, but you can't knock a program until you have all of the goals of that one person. They could be in a job with a significant pay raise in 2 years and they could dump extra into the mortgage later. All kinds of scenarios. In any case, thanks for your input.

Robert..... what's funny is when it's slower, you see commercials all over the place. I even see more commercials from Countrywide. Even the big boys need to attract business. And people forget, commercials cost money and they need to pass this down to the client one way or another.

And when a company advertises a funky program that many people won't qualify, that company doesn't care. They are hoping anyone will call in hoping to qualify for that program and then the loan officer can talk them into something else. It's just the way the system works.

Jun 04, 2007 01:05 PM

David A. Podgursky PA

THE PODGURSKY GROUP @ Re/Max Direct - Boynton Beach, FL

THE PODGURSKY GROUP - Make the Right Move!

The lenders that advertise like that are catching up with what I've always said which is that PAYMENT is key, not rate or purchase price...

but my meaning was that I qualify people on whether they can afford $1000/mo (example) not whether they want a 9% rate...

sometimes nice people run for the hills and listen to the advertisers based on promised RATES.. but when they get denied, we honest mortgage brokers still don't look good ...

I had someone come to me looking for a loan... there were so many variables but credit and employment were big strikes... the BEST rate was 9.25% on $115K purchase, 100%... she said no; she should get no higher than a 6.5%... but that just was not possible. After I showed the PAYMENT, it all fell into line... down the road we can work on the rate and payments... but for now, that was the best option. Not to mention, she'll have some credit repair done just by having a mortgage!

Jun 05, 2007 02:24 AM

Jeff Belonger

Social Media - Infinity Home Mortgage Company, Inc - Cherry Hill, NJ

The FHA Expert - FHA Loans - FHA mortgages - USDA loans - VA Loans

David..... I agree with many of your points. That is why I included my link, Rate vs Payment. But what is sad are those that think or know that they can get lower just because of how some lenders advertise. thanks for sharing this.

Jun 06, 2007 01:27 AM

Janet Guilbault

Platinum Home Mortgage Company - Walnut Creek, CA

San Francisco Bay Area Direct Mortgage Lender

Hi Jeff: Are you a night owl tonight?

You have written an excellent post, with many great points. I remember when I first got into the mortgage business, and fully realized what an option ARM was, I walked through the halls asking the more experienced brokers, "Wait, why would we do these loans?" I just didn't get it, even while prices were going up rapidly here in California, and most of the brokers in the company had personally used option ARMS to buy their own houses.

But when prices crashed, and I had to talk to people literally STUCK in their loans (as falling values and rising loan balances collided), I was reminded of the many auto lease clients stuck in their cars(and miserable) due to negative equity.

At least they didn't have the added insult of a prepayment penal

Jun 06, 2007 04:49 PM

Jeff Belonger

Social Media - Infinity Home Mortgage Company, Inc - Cherry Hill, NJ

The FHA Expert - FHA Loans - FHA mortgages - USDA loans - VA Loans

Janet.... sometimes... ;o) I agree on so much of what you mentioned about the cofi arms / pay option arms. Again, I new a few offices where this was all that they sold. I am sure their phones are ringing off the hook with complaints now. Again, it's not a bad loan, but it needs to be handled with care.

In any case, thanks for the comments and for the generous compliment.

Jun 07, 2007 05:47 AM