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Specialty Mortgages: Risks and Rewards

by Kijner & Sons International Realty

In high-priced housing markets, it can be difficult to afford a home in Miami or Sarasota Florida. That’s why a growing number of homebuyers are forgoing traditional fixed-rate mortgages and standard adjustable-rate mortgages and instead opting for a specialty mortgage that lets them “stretch” their income so they can qualify for a larger loan.

But before you choose one of these mortgages, make sure you understand the risks and how they work.

Specialty mortgages often begin with a low introductory interest rate or payment plan - a “teaser” - but the monthly mortgage payments are likely to increase a lot in the future. Some are “low documentation” mortgages that come with easier standards for qualifying, but also higher interest rates or higher fees. Some lenders will loan you 100 percent or more of the home’s value, but these mortgages can present a big financial risk if the value of the house drops.

Specialty Mortgages Can:

  • Pose a greater risk that you won’t be able to afford the mortgage payment in the future, compared to fixed rate mortgages and traditional adjustable rate mortgages.
  • Have monthly payments that increase by as much as 50 percent or more when the introductory period ends.
  • Cause your loan balance (the amount you still owe) to get larger each month instead of smaller.

Common Types of Specialty Mortgages:

  • Interest-Only Mortgages: Your monthly mortgage payment only covers the interest you owe on the loan for the first 5 to 10 years of the loan, and you pay nothing to reduce the total amount you borrowed (this is called the “principal”). After the interest-only period, you start paying higher monthly payments that cover both the interest and principal that must be repaid over the remaining term of the loan. 
  • Negative Amortization Mortgages: Your monthly payment is less than the amount of interest you owe on the loan. The unpaid interest gets added to the loan’s principal amount, causing the total amount you owe to increase each month instead of getting smaller.
  • Option Payment ARM Mortgages: You have the option to make different types of monthly payments with this mortgage. For example, you may make a minimum payment that is less than the amount needed to cover the interest and increases the total amount of your loan; an interest-only payment, or payments calculated to pay off the loan over either 30 years or 15 years. 
  • 40-Year Mortgages: You pay off your loan over 40 years, instead of the usual 30 years. While this reduces your monthly payment and helps you qualify to buy a home, you pay off the balance of your loan much more slowly and end up paying much more interest. 

Questions to Consider Before Choosing a Specialty Mortgage:

  • How much can my monthly payments increase and how soon can these increases happen?
  • Do I expect my income to increase or do I expect to move before my payments go up?
  • Will I be able to afford the mortgage when the payments increase?
  • Am I paying down my loan balance each month, or is it staying the same or even increasing?
  • Will I have to pay a penalty if I refinance my mortgage or sell my house?
  • What is my goal in buying this property? Am I considering a riskier mortgage to buy a more expensive house than I can realistically afford?

Be sure you work with a REALTOR® and lender who can discuss different options and address your questions and concerns!

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Sources:

Learn about the National Association of Realtors® Housing Opportunity Program at www.realtor.org/housingopportunity.

For more information on predatory mortgage lending practices, visit the Center for Responsible Lending at www.responsiblelending.org.

 

Get Your Finances in Order: To-Do List

by Kijner & Sons International Realty

If you are looking to buy a house in Miami or invest in Sarasota Florida, Kijner & Sons International Realty gives you tips to get your finances in order before asking for a loan.

1. Develop a household budget. Instead of creating a budget of what you’d like to spend, use receipts to create a budget that reflects your actual spending habits over the last several months. This approach will factor in unexpected expenses, such as car repairs, as well as predictable costs such as rent, utility bills, and groceries.

2. Reduce your debt. Lenders generally look for a total debt load of no more than 36 percent of income. This figure includes your mortgage, which typically ranges between 25 and 28 percent of your net household income. So you need to get monthly payments on the rest of your installment debt — car loans, student loans, and revolving balances on credit cards — down to between 8 and 10 percent of your net monthly income.

3. Look for ways to save. You probably know how much you spend on rent and utilities, but little expenses add up, too. Try writing down everything you spend for one month. You’ll probably spot some great ways to save, whether it’s cutting out that morning trip to your favorite coffee shop or eating dinner at home more often.

4. Increase your income. Now’s the time to ask for a raise! If that’s not an option, you may want to consider taking on a second job to get your income at a level high enough to qualify for the home you want.

5. Save for a down payment. Designate a certain amount of money each month to put away in your savings account. Although it’s possible to get a mortgage with only 5 percent down, or even less, you can usually get a better rate if you put down a larger percentage of the total purchase. Aim for a 20 percent down payment.

6. Keep your job. While you don’t need to be in the same job forever to qualify for a home loan, having a job for less than two years may mean you have to pay a higher interest rate.

7. Establish a good credit history. Get a credit card and make payments by the due date. Do the same for all your other bills, too. Pay off the entire balance promptly.

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Source: The National Association of Realtors® (NAR)

How Big of a Mortgage Can I Afford?

by Kijner & Sons International Realty

Not only does owning a home in Sarasota or Miami, Florida give you a haven for yourself and your family, it also makes great financial sense because of the tax benefits — which you can’t take advantage of when paying rent.

The following calculation assumes a 28 percent income tax bracket. If your bracket is higher, your savings will be, too. Based on your current rent, use this calculation to figure out how much mortgage you can afford.

Rent: _________________________

Multiplier: x 1.32

Mortgage payment: _________________________

Because of tax deductions, you can make a mortgage payment — including taxes and insurance — that is approximately one-third larger than your current rent payment and end up with the same amount of income.

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Source:

For more help, use Fannie Mae’s online mortgage calculators

The National Association of Realtors® (NAR)

Budget Basics Worksheet

by Kijner & Sons International Realty

The first step in getting yourself in financial shape to buy a home in Sarasota or Miami Florida is to know exactly how much money comes in and how much goes out. Use this worksheet to list your income and expenses below.

INCOME

 

Take Home Pay (all family members)

 

Child Support/Alimony

 

Pension/Social Security

 

Disability/Other Insurance

 

Interest/Dividends

 

Other

 

Total Income

 

 

EXPENSES

 

Rent/Mortgage (include taxes, principal, and insurance)

 

Life Insurance

 

Health/Disability Insurance

 

Vehicle Insurance

 

Homeowner’s or Other Insurance

 

Car Payments

 

Other Loan Payments

 

Savings/Pension Contribution

 

Utilities (gas, water, electric, phone)

 

Credit Card Payments

 

Car Upkeep (gas, maintenance, etc.)

 

Clothing

 

Personal Care Products (shampoo, cologne, etc.)

 

Groceries

 

Food Outside the Home (restaurant meals and carryout)

 

Medical/Dental/Prescriptions

 

Household Goods (hardware, lawn, and garden)

 

Recreation/Entertainment

 

Child Care

 

Education (continuing education, classes, etc.)

 

Charitable Donations

 

Miscellaneous

 

Total Expenses  

 

Remaining Income After Expenses

(Subtract Total Income from Total Expenses)

 


Looking to invest in or move to Florida? Contact Kijner & Sons International Realty at info@kijner.com

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Source: The National Association of Realtors® (NAR)

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Kijner & Sons International Realty
83-85 Boulevard de Charonne, 75011 Paris, France


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