Prior to the depression of the 1920s, there was a mortgage loan product used by many of the American people, known as the interest only loan.  Why did this long disappear?  And why has it suddenly reappeared?  Let’s take a moment to answer each question, and hopefully provide some food for thought.

            During the 1920s and into the early 30s, many of the citizenry of this country chose to live above their means.  They chose the interest only loan because it allowed them to purchase a larger home for less money.  What happened when the stock market crashed and jobs were scarce, and there was no income?  Many of these people were left without homes; as they had chosen to simply pay the interest on their mortgage there was no equity built into their homeownership.  When no equity builds, and the income ceases, the bank forecloses and residents or forced from their homes.

            During the Great Depression this happen to many many homeowners.  It was at this juncture that many landing institutions chose can remove this loan product from their offered products as it was simply too risky.  But with the creation of the many mortgage products offered today, the interest only loan has made a return.  And what a return!

            Today the interest only loan market segment comprises some 30% of the entire loan market; a development of only four years.  Prior to 2001 days only loan market was a 3% segment of the entire market; the exponential growth we’ve experienced has set new records not only for the mortgage market, but for many financial markets in general.  Add to this tremendous growth the also tremendous growth of the housing industry, and you have a very delicate situation.

            But does the  interest only loan good for the average consumer?  Not very much.  There are individuals who truly benefit from an interest only loan, but they fall into a very small category.  The greatest benefactors of interest only loan would-be investment individuals and young professional individuals who do not intend to retain their home for more than five years.  How many of the actual mortgage applicants follow into this category?  Less than 5%.  So how do we have only 5% of the population that actually qualify for the interest only loan, and an interest only loan market of 30%?

            We have these conflicting figures because not everyone that purchases in interest only loan truly benefits from an interest only loan.  The mortgage lender is not concerned with the benefit of the product to the purchaser.  The mortgage lender is interested in the profitability of the  product he or she has sold.  And interest-only loan is a truly profitable product.  In fact, the entire payment is a profit to the lending institution.  Not one penny of the payment applies to principal for a specified term.  Interest only payments, generally comprise only five to seven years of the entire term of the loan.  After the initial five to seven year interest only term, the consumer begins to pay greater payments that apply to both principal and interest.  As you can say this is truly not in the interest of the consumer, as most consumers do not begin to see a rise in income as quickly as they begin to see a rise in mortgage payment.

            Investors who have a trying staff of financial advisers and lending specialists truly understand how to use an interest only loan in order to turn a profit, but there is where an investor is not a homeowner.  For homeowner has no interest in profitability, they are concerned with residency stability.  They cannot afford to lose their home; an investor can afford to lose an investment.  As you can see, there may have been merit and validity to the decision to remove interest only loans from their product offering during the 20s and 30s; it’s quite possible today, that we have lost sight of the devastation  and destruction witnessed during the Great Depression.  Let’s just hope the bubble doesn’t burst.  Interest only loans are encouraging borrowers to live at the limits of their means, and I don’t think that’s good for the borrower, the economy or the housing market.  What happens to the homeowner, should the bubble burst?

It would seem that in this century we’ve managed to take every form of credit possible, extend it to the limit, and then look at them as if to say, “You mean you can’t pay?”  What do these loan and credit companies think they’re going to be facing, when the amount of credit and mortgage they’re willing to extend, reaches beyond the acceptable debt to income ratio?  Why do they think these limits were established in the first place?

            More consumers than ever before owe massive credit card debt.  It’s the way to go, many college campus’ are overrun with representatives from the major credit card companies, eager to extend credit to the young hands of the college student.  Are they as ready to work with them when they can’t pay? No. What about the rest of the crazed, spending public? How do they handle their credit cards?   Well, thanks to the interest only mortgage, we can now pay off credit card debt we can’t afford, with a mortgage we can’t afford.  Now, that’s progressive thinking.

            The interest only mortgage is now a tool for replacing non-deductible over extended debt, with tax deductible over extended debt, and consumers continue to be the ones to pay.  This is not a wise option, if you’re already spending more than your budget will allow, how about cutting back?  Did that ever occur to the mortgage company?  No, because they don’t make any money if you learn to spend less.

            As a fellow consumer, each of us should take the time to question our spending habits.  Is it wise or necessary?  If the answer to either question is no, then don’t spend.  You don’t want to have to make the decision between over the limit spending, and a nice, warm bed, do you?

Okay, now here’s an interesting spin on an already risky product, let’s give the bad credit crowd a chance to make an even worse decision, and finance a home they can’t really afford and obviously will have trouble making on time or dependable payments so they can payoff credit card debt, only to charge it up again!

            Sometimes, the products and situations that you see in the everyday world of researching these loans, is truly amazing and this is one of those situations.  There are actually mortgage companies that advertise these interest only mortgage options for the consumer with the bad credit record to pay off any outstanding credit card debt!

            Now, what I’d like to know is why the mortgage company, in all good faith, would want to take a risk such as this.  It’s risky financing for consumers with bad credit, when you’re financing with good solid collateral, well within their means to pay.  You take the consumer and the mortgage loan outside those realms of operation, and you’re just simply asking for a problem.

            Maybe we should have an agency that’s known as the “mortgage police” and when there’s a clear and evident violation of just good sound common sense, a whistle blows, the computer locks up, and in walks the mortgage police.  I truly believe the consumer, if not the mortgage company would be a lot better off; especially when the consumer has time to really absorb the basic facts about interest only mortgage, and the mess they can make of their finances; in the case of the bad credit consumer, the further mess they can make of their finances.

            With all the government control that regulates the mortgage loan industry, and all the statistics that are published about the consumer with a bad credit rating, who do you suppose thought it would be a good idea to give them an interest only mortgage, that they more than likely will have further trouble paying?  You wonder if Alan Greenspan is aware of this situation, and if he takes it into consideration when raising the prime interest rate?  Do you suppose there’s a number factor for the “really going to default on these loans” segment of his equation that determines our prime lending rate? 

            What kind of information will you need in order to shop for and secure a great interest only mortgage, with a great low interest?  Well, you’re definitely going to need a good credit rating, proof of income, an appraisal on the property, and a little bit of luck.  There are several products out there in the interest only mortgage segment of the market, and a few are actually going to have a pretty low interest rate tied to them. 

            For example, the 3/1 ARM, or the 5/1 ARM, these mortgages should have great interest rates, and if you have great credit, you should be able to find financing to suit your budget, your desire for a low interest rate, and an interest only mortgage that you can live with.  These types of adjustable rate mortgages offer the interest only feature for a very limited time, and this is what the average consumer should discipline him or herself to use for financing.  Extending the interest only option out past these years, could put the consumer in a dire position, should the real estate market take a downward turn, they’re going to be left with a huge mortgage, and property that is no longer worth the original mortgage amount.  Now, that’s not likely to happen since the value of the average home in America has seen a steady 5 to 6% growth for the last 10 years.  But, it could happen.  Take a look at the stock market after the tremendous growth spurt of the late nineties.

            Other variables in your quest for a low interest rate will be determined by the type of lending institution you choose, the determination of any government program eligibility, and your geographical location.  

            Banks are traditionally a little higher with their down payment requirements, but their interest rates are usually lower than those of a mortgage company.  The exception: online mortgage lending.  Thanks to the fact that this is an area of growth that everyone and every company are promoting, they’re striving to compete with even the lowest interest rate lenders, in order to grow their market.      

            What kinds of government approved mortgage loan programs are available for the low interest-only mortgage shopper today?  There are actually more programs available today than any other time in recorded mortgage history; and the ability to qualify for these programs is at an all-time high.  Fannie Mae, or the Federal National Mortgage Association and Freddie Mac set guidelines and product availability for homeowners and residents that quality for low- to moderate income based mortgages. They also offer low-interest only mortgages in order to accommodate an ever broadening market. The graduated payment mortgage is an option for FHA homeowners who currently have low to moderate incomes but expect them to increase substantially over the next few years; this can be compared to a balloon note or the interest only products in use today.

            Your location will play a key role in your ability to obtain the lowest interest rate using the interest-only mortgage option, also.  Prospective homeowners looking to purchase a home in a high end, resort area will, of course, have more choices available, as there are more buyers and sellers competing, as well as lenders for business. The other geographical contributing factor is the real estate market in your area.  If the market is great, prices are not suppressed, and there is moderate movement in the buy and sell market, it increases your chances of obtaining the low interest rate you’re seeking.

            The interest only mortgage product and a low interest rate are not mutually exclusive.  They can be paired, and under the right circumstances produce a winning mortgage product for the right consumers.  The route to achieving this goal will take education on the part of the consumer, hard work, and a little luck in locating the right mortgage lender.

            If a potential buyer has the greater possibility of securing a mortgage, the greater the opportunity to sell a home or buy a home becomes;  Whenever the opportunities increase for the buying and selling of real estate, then the prices for real estate increase.  Can you clearly see the relationship now and how one drives the other?   As the mortgage market has expanded, and the possibilities broadened, so have the prices of homes, the new home construction market, as well as the commercial development of real estate.

            The potential for problems exist when this all happens too quickly, or when the growth in one area exceeds the average growth rate of other areas.  This is the case with the real estate market and the interest only mortgage.  Much of the growth in the mortgage market has been with interest only loans.  Many analysts put the interest only segment of the mortgage market at almost 23%.  That’s a huge hunk of the entire mortgage market and this segment has been responsible for most of the overall growth. It would also seem that it has played a tremendous role in fueling real estate prices.  Is this a rollercoaster ride, waiting for the drop, if so, let’s hope we’re all buckled in!

            Let’s take a moment to look at the four areas that contribute to this continued upward growth, and their impact on real estate.

            The price of existing homes on the market is a pretty easy one to figure out; if you have your home for sale, quite naturally it will bring a comparable price to the other homes in your area.  How does this serve to drive real estate prices?  This concept works with a Domino effect, in that when one home increases in value, it also affects the homes around it driving the price, further upward. 

            The new home construction market is heavily reliant on building material prices to determine the building cost and the contractor’s profitability.  If building construction is on the increase quite naturally, the prices of building materials are on the increase; when you have an optimistic and growing economy, you will have increases in building material cost.

            The other big drive in the real estate market comes from the development of commercial property.  In resort areas, particularly the development of real estate property for commercial purposes tends to quickly affect the surrounding areas real estate prices.  Many of today’s commercial mortgages have reached loan limits well over $1 million; in fact, some of the residential mortgage loans in certain resort areas are approaching the have the million-dollar mark.

            Now, when you combine all of these contribute factors, a mortgage market that is extremely optimistic with its lending capital, you have the makings of a market segment, with the potential for a bubble effect.  What happens in a bubble effect economy?  The bubble continues to grow until it bursts.  This is what many analysts and economists fear: that too many consumers are betting the farm on a continual, optimistic spurt of growth.  What could cause our booming economy to rupture?  In reality, many conditions can contribute and provide the needed catalyst.

 Well, what if there is a continual increase in pricing but there is generally a continual downward spiraling of the ride we’re on?  Well, if there should be a tremendous downward turn in the investment market, if there is a continuing loss of jobs in this country, or if there are any natural occurrences that lead to disasters that are beyond governmental or company control, you could see a possibility for disaster.  Does that mean it will happen?  No.  It just means that the potential exists.  But in the defense of the housing and real estate market, if you’re going to be risky, that’s the place to be.  It’s one of the safest risky businesses that exist.

            In 1968, just thirty years after her government commissioned birth, Fannie Mae became a private company operating with private capital.  She had outgrown her need for federal funding and supervision.  That does not mean, however, that the government does not still closely work with the Fannie Mae Corporation.  It does. The housing industry has continued to grow, and currently the entire mortgage market is experiencing phenomenal success.  Fannie Mae’s focus, however, is still on the low to middle-income American.

Fannie Mae deals only in the secondary mortgage market, this way Fannie Mae Corporation can ensure that money for mortgages is available throughout the 50 states and that as many homeowners as possible can take advantage of home ownership.

            How does Fannie Mae continue to fund the mortgages that she buys?  Through the issuance of mortgage backed securities. These securities known as MBS are issued to investors.  When Fannie Mae issues the MBS, she is guaranteeing the investors a return on their investment, and at the same time, providing a source of funding for issuing further mortgages.   This provides the nation’s lenders with a steady stream of cash to continue to make mortgages available to the consumer.

            How does all this relate to the home of your dreams?  Well, stop just a moment to connect all the dots.  Fannie Mae buys mortgages from your local lender.  The lender receives the proceeds from that purchase, and can then offer a new mortgage to you.  It’s a steady and continual circle of growth.  Why?  Well, Fannie Mae isn’t the only lender in the secondary market.  Insurance companies, pension funds, securities dealers, and other financial institutions buy mortgages on the secondary market.  Who invests in these insurance companies, pension funds and securities dealers?  Where do they get their money?  From taxpayers just like you.  Mortgage holders just like you.  Now can you see how Fannie Mae and other mortgage lenders in the secondary market, work to foster home ownership and community growth, all in one process?

            The primary focus for Fannie Mae, operating under a government directive, is to provide the maximum amount of help to lenders in making mortgage loans to the low, to middle, to moderate income families across America.  Fannie Mae is also involved in a nationwide effort to join with lenders and community partners to create even more home ownership possibilities.

            Through this partnering, and the existence of FHA backed mortgage loans, the Fannie Mae Corporation and your local lender can offer a greater variety of loan products, and reach a much broader client base.  This increases once again, the homeownership possibility for many, more Americans.  Thanks to the expanding mortgage product line, the increase in real estate values, and the efforts of Fannie Mae, more Americans own their own home than ever before.  Where will the future take Fannie Mae, and corporations like her?  I think the Fannie Mae Corporation will continue to foster growth and the realization of the American Dream for many successful years to come.

Some factors to consider when choosing from the different home loan programs.  Your current financial situation, do you expect this situation to change?  How comfortable are you with a changing mortgage payment?  A fixed rate mortgage can save you thousands in interest over the period of the loan, but it will also give you higher monthly mortgage rates.  An adjustable rate will start you out with lower monthly payments but you could face higher monthly payments if the rates change.

You have decided which type of loan is best for you, now you need to choose which of the more popular home loan programs, is the best one for you.

Conventional loans are secured by government sponsored lenders.  They are also known as government sponsored entities (GSE’s).  They can be used to purchase or to refinance single family or 4 plex homes with a first or a second mortgage.  There are limits that are adjusted annually if needed based on the national average of new homes.  You would need to check what the current year’s limits are for an accurate amount if you were to choose this type of home loan program.

FHA loans are programs to helping low income families become home owners.  By protecting a mortgage company from default they encourage companies to make loans to families that many not meet normal credit guidelines.  Some of the highlights of these loans are.  Lower down payments can be as low a 3% versus the normal 10% requirements.  Closing costs of up to 2 or 3 per cent of the home value can be financed, this reduces the up front money needed.   The FHA also imposes limits on the fees from the mortgage company such as the loan origination fee can not be more than 1% of the amount of the mortgage.

VA loans are available to military veterans who served on active duty and were discharged under conditions other than dishonorable.  The dates for eligibility are WWII and later.  World War II (September 16, 1940 to July 25, 1947), Korean conflict (June 27, 1950 to January 31, 1955), and Vietnam era (August 5, 1964 to May 7, 1975) veterans must have at least 90 days service. Veterans with service only during peacetime periods and active duty military personnel must have had more than 180 day’s active service.  There are other eligibility requirements.  If you think you may be eligible contact your local or state veterans’ administration representative.

The biggest factor in a VA loan is that no down payment is required in most cases.  There is no mortgage insurance payments needed, closing costs to the buyer are also limited.  You can negotiate rates with the lender and you then have a choice of payment plans with up to a 30 year loan.

The last loan program we will mention is called a subprime loan.  This is a loan for people with poor credit who would not qualify for a conventional loan or a VA or FHA guaranteed loan.  These loans normally will require a higher down payment and have a larger interest rate.  This is because of the risk involved to the mortgage company.  These loans should normally be considered for a limited amount of time such as 2 to 4 years.  It is a good way to improve your credit situation and then refinance with more favorable terms.

We have shown finding or planning that new dream house is just the beginning of the journey into your new home.  The right answer to the question, which of the home loan programs is for you, takes research and a honest look at your personal situation.

Home loans are recent craze in the loan market now days. The reason being the fact that, home constitute out as the largest asset that usually people have. While purchasing a home, the person has to invest a very huge amount of money. Some people face trouble, paying out the whole money together for the house, while some can’t even afford to invest money for the home of their choice. Home loans, this way have turned out to be a boon for people, who want to have a home of their choice, but cannot afford it at the moment concerned.

Buyers now days don’t have to think about the source of money for their homes. Home loans have made the life of a lot of buyers very easy. But, the buyers should be careful while opting or going for a home loan. They should first, make a thorough research of the prevailing interest rates in the market, and then opt or go for any home loan. Borrowers can even go for home loans, by undertaking mortgages. In this, the borrowers take a loan after pledging or securing any asset or securities of theirs, against the sum borrowed by them.

While going for a home loan, the individuals should take care of the other various aspects relating to the home loan. An individual before going for a home loan should take care, before deciding the principal amount that he is going to borrow as a home loan. Otherwise the person may end up taking a loan with a higher principal amount and then end up paying more interest for the amount that he had borrowed unnecessarily. The second aspect that the borrower should consider is the interest factor associated with every home loan. Interest is an unwanted burden that comes attached with the home loan. Interest is the extra amount that the borrowers have to pay, for taking the loan from the lender. The borrowers motto should be take a loan which carries the lowest interest rates. For this, the borrower should make a complete research of the prevailing interest rates in the markets so that he does not get cheated by the home loan lenders. Borrowers should also consider the aspect of the term associated with the loan that he has undertaken, otherwise they may end up paying or repaying the loan for 30 to 35 years, just because of the fact that the loans conditions had stated that the principal amount has to be repaid on fixed amount over 30 years installment basis.

Home loans are a boon for people, but they should be careful before opting for a home loan.