Mortgage Mania

"Mortgage Mania" was the headline of the Arizona Republic article two days ago describing some of the new and different mortgage options available for home buyers in the Phoenix area (and elsewhere).

Some of these are structured very differently from what you are used to seeing. You need to know the different types to keep your home financing situation under your control.

INTEREST ONLY loans are just that - you are required to pay only the interest charges on a monthly basis. The upsides are lower payments and flexibility (you only pay on the principal when you have the money). But, you can find yourself in a mortgage for a long time if you don't pay the principal down regularly. It requires good financial discipline to manage this loan effectively.

80/20 OR PIGGYBACK loans. This is where the homebuyer gets two mortgages. One for 80% of the value of the home at a normal interest rate, the second for the remaining 20% of the value of the home at a higher rate of interest. The advantage of this type of loan is little or no down payment required to buy a home. Escrow officers tell me that they are seeing a lot of this type of piggybacking now. The disadvantage is that you will have two payments to make each month with one with a pretty high rate of interest. Make sure you can cover both loans and not be "house poor".

OPTION ADJUSTABLE-RATE loans. These loans are new and allow borrowers to pay less than the interest due on a mortgage by deferring part of the payment and adding it to the original loan balance. While it reduces payment amounts, this type of loan could quickly spiral out of control if at least the interest due on the loan isn't paid regularly. These loans offer the lowest payments but you could end up owing more on the loan than what they originally paid for the home.

Knowledge is power. Inform yourself as fully as you can before signing a mortgage. Knowing what you are getting into will go a long way toward keeping you out of future financial trouble with your mortgage.

Richard