East Bay Blog

Happy Cinco de Mayo to you. Did you know that Cinco de Mayo, or 5^th of May, celebrates the Mexican Militia victory over the French Army at The Battle of Puebla in 1862? Most people in the U.S. think it is Mexico’s Independence Day.

Well enough trivia let me get into my topic today on the East Bay Real Estate Blog. Today I am going to give you my opinion regarding a few of the different mortgages that I am seeing in the marketplace. Please remember that these are my opinions, and this is a blog, so feel free to post your own comments if you do or don’t agree with me. I appreciate other points of view. So here is what I think:

Option-ARM’s- These are adjustable rate mortgages that give you several options on how you choose to pay every month. I’ll be clear, I hate these loans. The biggest negative about this loan is that if you pick the wrong option, you will have negative amortization which will cause your loan balance to increase. If given the option, most people choose to make the smallest payment per month that they can. With this type of loan your payments could be tiny, but your loan balance is going up quickly. After a certain amount of time, or after your balance has gone up a certain amount, you may no longer have an option, and that is when the pain will begin. These types of loans usually only makes sense for savvy investors who know how to make a higher than market return on their money, and are willing to take the risk of paying market rate for an increasing loan balance every month. These loans became very popular over the last couple of years because people could qualify for the loan at the start rate (usually 1%) and mortgage brokers could advertise that they were offering you a 1% home loan. For most of us, this is a bad idea.

No Cost Loans- These loans sound great, and are easy for mortgage brokers to sell because people think that if the loan has “no cost” it must be free. Come on now, no one works for free, and these loans are not “no cost”, it’s just that instead of paying the costs up front, you are paying them every month in the form of a higher interest rate. These types of loans are ok, if you are planning to sell or refinance quickly. The way these loans work is that the lending institution pays the mortgage broker a certain amount of money for making a loan to you. The higher the interest rate, the more the broker gets paid. If the interest rate is high enough, the broker has enough money to pay all of your costs and still keep money for his paycheck. So instead of you paying for the closing costs, your broker pays them, but the interest rate you are being charged is a lot higher, because the lending institution had to give the broker money to pay for your costs and his paycheck… Make sure this option make sense for you before you get one of these loans. Compare the rate on this loan, to the rate you would get if you paid your own closing costs.

30 Year Fixed- This type of loan is great for those of you planning to stay put in your home for a very long time. It provides stability because your rate will never change, so you have the security of knowing your payments won’t go up. This is a good loan, however not the best option for everyone. If you are planning on selling or refinancing in say 3 to 5 years, you don’t need to have a rate that is fixed for 30.

There are many other loan options that I don’t have time to write about today, but if you are looking at buying or refinancing soon, feel free to give me a call, even if you are not using me as your agent. I don’t originate loans, so I have nothing to gain by telling you to choose one loan over another. Every loan is different, and depending on your situation, one type of loan will benefit you more than another.