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Confused by the Mortgage Maze?

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RISMEDIA, August 30, 2007-(MCT)-A day hasn’t passed in recent weeks without some discussion of the home lending and liquidity crisis.

Cable business news networks, newspapers, magazine and Internet blogs have been rife with reports of a mortgage meltdown. The crisis forced some lenders, such as Atlanta-based HomeBanc Corp., into bankruptcy protection. Other metro-area lenders, including SouthStar Funding LLC, simply ceased operations.

The fallout spooked global markets, and banks nixed the credit lines mortgage lenders depended upon to make loans. Investors who previously had bought those loans in pools of mortgage-backed securities scrambled away.

In the midst of the concern and confusion, what’s the best strategy for those in the market to buy a home or refinance a mortgage?

We asked a number of metro Atlanta’s leading lenders and brokers for their insights on some of the common mortgage products on the market, the benefits and potential pitfalls of each, and for whom they’re best suited.

HUGH ROWDEN, senior vice president, Wachovia Mortgage, Georgia
30-YEAR FIXED-RATE MORTGAGE: A mortgage with an interest rate that does not change during the 30-year life of the loan.
–Pros: This is the most common type of mortgage. Since the interest rate does not change, it provides stability and security for the borrower.
–Cons: The borrower’s creditworthiness can greatly affect the interest rate lenders are willing to offer. If you have poor credit, you might get a higher rate. And because it’s locked for 30 years, you lose the financial benefit if rates drop.
–Most suited for: Risk-averse home buyers seeking to lock a long-term interest rate that has a stable, predictable monthly principal and interest payment.
–Least suited for: A person who is looking for the lowest payment or knows he/she will be moving within a short time frame.

FHA LOANS: FHA loans are backed by the federal government and generally have relaxed credit guidelines. They also allow lower down payments for first-time home buyers and come in a number of different loan products ranging from one- to five-year adjustable-rate mortgages to 15- and 30-year fixed-rate mortgages.
–Pros: The FHA loan program has down payment requirements that are low and credit requirements that are less stringent. The adjustable-rate products are good at protecting the borrower from severe rate increases.
–Cons: Borrowers may be required to pay upfront mortgage insurance premiums as well as monthly premiums.
–Most suited for: First-time home buyers and buyers with limited savings for a down payment.
–Least suited for: Buyers who can afford a 20% down payment.

VA LOANS: Most lenders offer VA loans that are available to some veterans, active service members, reservists and members of the Public Health Service.
–Pros: The loans require no down payment. The government also limits the amount of closing costs and origination fees lenders can charge, as well as the appraisal fees. Veterans who qualify as 10% or more disabled as a result of active military service don’t have to pay a funding fee.
–Cons: Congress has levied one-time funding fees on VA loans since 1982. Those fees range from 1.25% to 3%, based on the veteran’s service and if it’s a first or subsequent loan.
–Most suited for: Veterans who have limited savings for a down payment.
–Least suited for: Veterans who can afford other loan types to avoid the funding fees associated with VA loans.
- JOHN M. PRUITT, senior vice president, SunTrust Banks’ Atlanta Regional Mortgage Manager

BIWEEKLY MORTGAGE: Allows the borrower to make half the monthly payment every two weeks. That ends in 13 total monthly payments a year vs. the 12 made in a typical repayment schedule.
–Pros: Shortens the amortization schedule so the loan is paid off sooner, saving on interest. Borrowers may convert back to the traditional monthly payment plan at any time at no penalty.
–Cons: Providers usually charge a set-up fee. Borrowers also may be charged a fee for each automatic draft.
–Most suited for: Someone who needs a disciplined approach to reduce the overall interest they’ll pay on their mortgage loan.
–Least suited for: A person who subscribes to an online bill-payment service and could set it up directly.
- MARK MILAM, mortgage banker, Sunshine Mortgage Corp.

PIGGYBACK, 80/20 OR 75/25 LOANS: A “piggyback” mortgage combines the use of a first and second mortgage when purchasing or refinancing a home. Piggybacks aren’t necessarily 100% financing; they refer to a scenario in which the borrower may finance up to 80% of the sales price with a first mortgage and the remaining 20% of the sales with a second mortgage. But they could do an 80-10-10, where the borrower puts 10% down and finances the rest through piggyback loans. Borrowers choose piggybacks to avoid paying mortgage insurance. Typically, when a home buyer puts less than 20% down, lenders will require mortgage insurance.
–Pros: Usually, lower payments and the ability to eliminate a large portion of the monthly payment by eventually paying off the second mortgage. If the rate on the first mortgage is ideal for the borrower, it could lessen the need to refinance later on.
–Cons: Because the borrower has two mortgages, the interest rate on the second mortgage is going to be higher for the added risk of carrying two mortgages on the home.
–Most suited for: Someone who can’t put 20% down but has good credit and an abundance of credit. Also good for people encountering difficulties in selling their homes in order to purchase a new property. It gives them temporary financing until the equity from the house they’re trying to sell becomes liquid.
–Least suited for: Those whose credit score is less than 680 and have fewer than four open credit lines on their credit report.
- JEFF FEE, president, senior mortgage consultant, Vertical Mortgage

ADJUSTABLE-RATE MORTGAGES: This loan type fixes the interest rate for a set period, ranging from one month to 10 years. When the fixed period expires, the mortgage will adjust to reflect prevailing interest rates. The borrower could end up paying a much higher rate. ARMs include two payment types: principal plus interest or interest only.
–Pros: ARM benefits include a reduced interest rate and therefore a lower payment during the period in which the mortgage is fixed.
–Cons: If the fixed period expires before the borrower sells or needs to refinance, the rate may adjust to one that is much higher.
–Most suited for: The disciplined borrower who wants a low, fixed rate over the time they are most likely going to own the home. For people with variable incomes and significant investment strategies, the money saved through an interest-only mortgage can be a great resource for building wealth.
–Least suited for: Borrowers without the discipline to properly allocate money saved on interest-only loans should not be encouraged to secure these mortgages for the sheer benefit of a lower payment.
- JOHN W. PARLANTE, senior vice president, Capital Mortgage Services Inc.

REVERSE MORTGAGE: Designed to strengthen senior citizens’ personal and financial independence, these loans allow homeowners to convert the equity in their home into cash. Any existing mortgage is paid off and homeowners don’t make any payments to the lender as long as they live in the house.
–Pros: Proceeds are tax-free as long as the property owner lives in the home.
There are no income or credit requirements to qualify and equity may be drawn through monthly payments from the lender to the homeowner or as a credit line.
–Cons: Though the property may be passed on to the homeowner’s heirs, money received from a reverse mortgage is payable to the lender when the property owner leaves permanently. All the fees are paid for upfront.
–Most suited for: A senior looking to shore up his or her personal independence who has amassed a lot of equity in his or her home and expects to be there for at least three years or more.
–Least suited for: Someone looking to fill short-term borrowing needs.

Copyright © 2007, The Atlanta Journal-Constitution
Distributed by McClatchy-Tribune Information Services.

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