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Specialty Loans: Risk and Reward

Tuesday, August 23, 2005 posted by Tommi Crow

The National Association of Realtors warned home buyers about so-called “affordability” loans that promise low, initial payments. The Realtors’ warning is particularily news worthy because Realtors sell homes to people who couldn’t qualify to buy a home, otherwise.

The press release said that home buyers “may not realize that monthly payments on some types of “specialty mortgages” can increase as much as 50% or more when the introductory period ends.”

Affordability or Specialty Mortgages include interest-only loans with rates that adjust with fluctuations in interest rates and the increasingly popular Option A.R.M. The A.R.M., offers borrowers several payment options each month, including one payment option that does not cover the interest due on the loan. When borrowers select that option, their loan balance grows because the payment amount is less than what is really owed to the lender. The borrower’s mortgage balance increases with each payment made. This financing oxymoron is known as “negative amortization”.

These “specialty loans” are very popular in California and other markets where house prices have rocketed. The danger is that when current house prices become unsustainable and interest rates continue to rise, these homes will be difficult, or impossible, to sell or refinance. Homeowner’s will have to cough up thousands of dollars to sell or refinance, or face immediate foreclosure.

There is little doubt that for most of us, these type of loans increase the risk of default. They are also being over-marketed and oversold. To better understand the risks involved contact the non-profit group, “Center for Responsible Lending”. They, in conjunction with the Realtors Association, have put together a brochure that offers advise on choosing a mortgage for your home.

Thank you for reading and if you have any questions or comments, please email tommi@infotube.net.