 Prior to the Great Depression, federal law gave banks the authority to terminate mortgages whenever they chose. In fact, a bank's only obligation to a borrower in this situation was to provide consumers with a notice instructing them to either pay off their loan in full by a certain date or face foreclosure. During the Depression, cash-strapped banks exercised this right en masse, and millions of borrowers ended up losing their homes.
This led to an entire generation of disenchanted consumers who were afraid to purchase a home that they couldn't afford to buy outright. Recognizing the gravity of the situation, the government stepped in and created the Federal Housing Administration, and the 30-year mortgage was introduced. Back then, there were no hybrids, no HELOCs, no piggy-back loans, no ARMs. A 30-year mortgage offered only a small selection of set monthly payments from which to choose. It was that simple.
Worlds away from the post-Depression Era, today's real estate market has evolved into a truly complex creature. No longer just a dream, home ownership represents a full-fledged investment with a laundry list of options, benefits, financial and tax incentives - and quite a few challenges as well. However, with expert advice from an experienced mortgage professional, today's homeowners can properly and profitably manage their most important investment in any mortgage market cycle, despite sensational media reports to the contrary.
The following are examples of simple solutions available to homeowners who might be caught up in an unexpected pitfall of a transitioning real estate market.
Interest Rates and Adjustable Rate Mortgages
ARMs and Option ARMs are one of the media's favorite subjects these days. Hardly a week seems to pass without some frightening headline about the painful impact that further interest rate increases could have on ARM borrowers once their loans reset.
In reality, there's really no reason to fear ARMs as long as you're working with a qualified mortgage professional. In fact, there are several ARM programs that make a lot of sense for borrowers in many different scenarios.
However, for those who have had, or anticipate having, substantial increases in their monthly payments, ask your loan professional if an intermediate ARM or a tiered fixed-rate program is right for you. Often, these loans can provide instant payment relief and limit one's liability until interest rates decline. To ensure the full benefit of an intermediate ARM, you will want to carefully examine the terms of any pre-payment penalty to determine whether the up-front savings are worth the commitment. In the case of a tiered fixed-rate program, be sure to secure a cap rate that's lower than your current rate in order to maximize your overall savings. When choosing either of these types of loan programs, it's important to be sure that your loan professional has a deep understanding of interest rates and the real estate market. It will be their job to get you an even lower rate once the market turns.
Looking to Move in a Buyer's Market
Another favorite subject of the media these days is the housing market's transition from a "seller's market" to a "buyer's market" in the midst of rising interest rates. Many homeowners who are thinking about moving into another home or refinancing their existing mortgage are paralyzed with doubt as to what they should do.
In uncertain times such as these, expert advice is a true commodity. Unsure buyers and sellers should contact an experienced, resourceful loan professional with strong ties to successful real estate agents. Working together, a lender and an agent can create the kind of strategic marketing and buyer incentives that will save money and lower monthly payments. It's an unfortunate fact that sometimes real estate agents and loan officers don't communicate as much or as well as they could, so working with a mortgage team that has a strong history and a successful track record together will ensure the best results.
Utilizing Equity
Home equity has also become a subject of sensational interest to the mass media. Weekly headlines scream about declining home sales and values, leaving homeowners fearful of the liquidity of their largest investment. And, while no one can accurately interpret every nuance of the market and what the future will bring, history often leaves reliable clues, especially when it comes to its cyclical nature.
Simply put, there is nothing to fear about owning a home. Historically, real estate appreciates over time by an average of almost 5%-6% annually. In down markets, it's true that access to the maximum equity available is more limited. However, by obtaining proper advice from a mortgage professional who's able to work in conjunction with CPAs and Certified Financial Planners, homeowners will be able to ensure the proper management of not only their equity, but also their debt, short-term investments, and retirement savings.
The world of real estate has definitely changed since the post-Depression Era when 30-year mortgages became so prevalent in the US. What remains constant, however, is that homeownership is still the biggest, most important investment most Americans will ever make. With this in mind, homeowners who align themselves with a mortgage specialist have only the mass media to fear in this environment of change.
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