Re: How can mortgage payment be this low?

[EMAIL PROTECTED] (John) wrote in message news:<[EMAIL PROTECTED]>...
> Hi,
> 
> I have received some loan solicitations that claim to be able to cut
> my mortgage payment nearly in half (A.R.M. 1.25% start rate/3.87%
> APR). How does this work? Am I gonna pay an arm and a leg for the
> points and costs? What's the catch? What's APR anyway? Thanks for
> sharing!
> 
> John


John,

There are a thousand different loan products out there and you're
going to have to educate yourself somehow about the differences before
you make a good decision.  The best all-around thing right now is a
fixed rate, preferably fifteen years, because rates are so low.  There
are exceptions, such as your job contract expires in two years and you
know you don't want to renew it.  Then take a variable at low rates
and run after two years.  But the best all-around, generally good
product is the current low-rate, fixed-rate loans. This bit of advice
will change as interest rates and your situation changes over time.

The next consideration is points and fees which can be thousands of
dollars.  One lender might have low points, but have thousands hidden
in junk fees to make up the difference.  Lots of sharks out there
including escrow companies, lawyers, loan brokers, etc.

But for right now, I'll focus on your original post.  A.R.M. stands
for adjustable rate mortgage.  The rate can go up and down, adjust,
and can be tied to any one of many indices(indexes).  The most common
rate is "prime", and you'll get prime plus 2% for example.  A.P.R.
stands for annual percentage rate.

The problem with the loan you mentioned in your post is that the start
rate is less than the A.P.R.  What that means is that it's sort of a
loss leader, but you'll be the one making up the loss.  Let's say that
at your 3.87% A.P.R., your payment would be about $600/month.  But at
the start rate of 1.25%, your payment is only about $200.  So what
happens to that $400 difference?  It's added to your loan principal. 
After several years of paying money monthly towards your mortgage, the
principal amount will actually increase, not decrease.  So if the
rates go up, the real estate market stays flat for several years, and
you go to sell, you could be upside-down, owing more on your house
than it's worth.  But no matter, even if your house appreciates
greatly, you'll owe more than you owed when you started.  I hope
you're thinking right now that this is not such a good deal.  This
would be a good deal if you needed to impress somebody right now with
the big house you own and didn't want to worry about the consequences
a few years down the road.  (Sort of like leasing a big car, but
different.)

For the majority of people with rates this low, grab the shortest
period of fixed loan you can afford, and shop around for an honest,
cheap lender.  Credit unions are a good place to start.  And
everything is negotiable, especially at loan brokers.  If they have
low fees, but are 1/8 higher in the interest rate, tell them they've
got the loan if the come down an 1/8 and they will.  They'd rather
have the deal with most of the commission than no deal at all.  (Take
a look at the cars they drive and you won't feel guilty.)

Hope this helps and if you have additional questions, feel free to
post back to the n.g.

Ken