Five Mortgage Products on the Endangered Species List

Posted by  on Apr 17, 2009

A decade ago, a booming economy and skyrocketing housing prices gave birth to an entire family of non-traditional home loans. Today, in the midst of an unprecedented decline in home values, some borrowers are trying to figure out how to escape their non-conforming mortgages. Five previously popular home loan programs have fared differently in today's economy. If your mortgage looks like one of these, learn what you can do to stabilize your debt.

"No-Doc" Home Loans
At the height of the hot housing market, some lenders saw little need to verify employment, assets, or income. After all, many home buyers gained ten to twenty percent home equity within a few years under those conditions. Today, it's impossible for many "no documentation" borrowers to get a mortgage. If you have a no-doc loan but could document your income and assets now (it is tax time so that might provide you the opportunity to prove your income) it might be smart to refinance to a conventional loan at today's lower fixed rates.

125% Home Improvement Loans
Popular in parts of the country where local economies were in overdrive, the 125% mortgage went beyond the late night infomercial dream of buying property with no money down. Lenders kicked back a quarter of a home's sale price as a line of credit that borrowers could use to buy furniture, appliances, or builder upgrades. These loans have been extinct for at least two years--don't expect to refinance into one today. Reassessing your property value and refinancing to a fixed rate may not get you afloat, but could keep you from sinking further into debt.

LIBOR Adjustable Rate Mortgages
The London InterBank Offered Rate often provided a baseline for interest rates even lower than the U.S. Prime Rate. As of February 2009, the LIBOR is at 1.25% and many ARMs are adjusting to under 4%! LIBOR ARMs and hybrid ARMs are still quite popular and available. If your plans for your mortgage are short-term, enjoy the low rate and maybe take the opportunity to pay down some of your principal balance. If your plans are long-term, consider refinancing to a fixed rate--it may result in a higher monthly payment, but will offer long term stability.

Option ARM Home Loans
The Option ARM appealed to consumers who believed that their earning power would grow. These loans were often coupled with features like no income verification for an extra premium. Option ARMs gave borrowers a choice of 4 payments each month: a small minimum that didn't even cover the interest owed, an interest-only payment, a fully-amortized payment, and an accelerated payment. The loans were appropriate for borrowers who had every reason to anticipate significantly higher earnings or those with fluctuating or seasonal (but adequate) income. However, borrowers who needed that minimum payment to get by every month, who stated a higher income than they had ion their applications, and who used this loan to buy a bigger house than they could afford are in serious trouble now. The minimum payment resulted in the balances getting bigger, not smaller (this is called negative amortization) and eventually the loans had to be recalculated and the payments spiked, doubling or even tripling. These loans are pretty much extinct.

Stated Income Mortgages
Unlike "no doc" loans, stated income (also called NIV or no income verification loans) did require borrowers to show assets. The more responsible lenders called for borrowers to have excellent credit, make a significant down payment, and show assets that would confirm the income stated (a typical requirement was six months of monthly gross income declared, so if you claimed to make $20,000 a month, the lender required you to have at least $120,000 in liquid investments).

Stated income loans, while not completely extinct, have been curtailed significantly. If you need such a loan, expect to put even more down (40% as opposed to 20%), have impeccable credit, and plan on paying a higher rate. In the past, interest rates were only slightly higher than for conventional loans, expect to pay several points more today.

Regardless of the type of mortgage you have right now, if you have a hardship, consider speaking to your lender's workout department about your plans to weather the recession. They may offer forbearance or modification programs that can help you gain control of your finances while building equity in your home.


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