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Originally Posted by Schneed10
Agreed. In the mortgage business, if it sounds too good to be true, it ALWAYS is. There are lots of creative ways to finance a home at a very low rate initially. That initial rate is the one mortgage companies will advertise, but the rate will change on you. This type of financing can be good in certain situations, but you really have to make sure you identify the risks. Like if the rate is set to jump up to 10% after 5 years, then the deal may make sense for you if you're CERTAIN that you'll move within 5 years. But if you don't move, and you stay past 5 years, you get crushed with that 10% rate (or you're forced to refinance). I prefer a plain, vanilla, 30-year fixed mortgage. You know exactly what you're going to be paying as long as you own the house. Lots of stuff can happen in life: getting laid off, spouse dying (God forbid), taxes raised, etcetera. I'd rather know what my payment will be.
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Well if you opt for a low rate intrest only loan through a
reptuable lender, they will put a life cap on the loan usually arount 2% through the short term. (meaning a 3yr arm, the intrest rate wont go over 2% above the original rate) at the end of the 3 yrs (or 1yr or 5yrs depending on the term u decide on), you do refinance, but what you're banking on is building equity in the house during those 3 yrs and then at the end of the three yrs applying that equity towards your refinancing. This option is great for first time buyers in a market where house prices exceed appraisal values. Most of these loans allow for 6%over the appraised price, whereas most conventional financing options allow for only 3%. So when you do refinance later its like locking in on the price of the house now, not paying the principal, but building equity and allowing for the market to advance well beyond your purchase price. And even though the rates do change, they are capped and dont change the monthly payment. Usually they just add an additional payment on the end of the loan, so the term changes, not the monthly payment.
Again this is how most
reputable lenders operate. There are lenders that will try to sucker people. You have to watch out for that.
It is also possible to get an arm like that for 3yrs with only a 1 yr early payback penalty. Theyre available, but hard to find because mortgage officers get offered incentives (thousands of $) to lock people in for the full term, wether they work for one lender or a broker.