Are 30-Year Fixed Mortgage Loans In Texas In Danger?

Worry or False Flag: Is the Popular 30 Year Fixed Mortgage Loan Going Away?

Part 1

The 30 year fixed mortgage has been a mainstay of home buyers for decades now, and for most people who don’t follow financial news or the markets it can be easy to believe it will be around forever. But is that true? While it’s not saying anything controversial to suggest this is the most well-known loan as far as terms and long-standing use, that doesn’t mean the model will stay viable forever.

Back in 2014 some fretting about the 30 year fixed mortgage because when Dick Bove made the attention gathering claim that the Fed’s decision to taper off purchasing mortgages would make those loans non-viable going on in the future. In other words, it might actually be curtains for this loan program – and that caught plenty of attention.

So Should We Kiss the 30-Year Fixed Mortgage Good-Bye?

There’s a lot of controversy over this idea. Seeing as how the terms and affordability of the 30 year fixed mortgage allowed home ownership to become so widespread, it’s kind of hard to imagine a modern lending world where this is not an option. Is this something to actually worry about, or is it just fear mongering and paranoia?

While only time will tell, it does seem that every few years speculation fires up about Fannie Mae & Freddie Mac. These agencies are government controlled and have been since the 2008 collapse. They have long been a necessary part of the economic process to back these loans and make them a viable option that banks are willing to embrace because of the backing that comes from those agencies. In other words, they play the “Middle Man” that allows the process to work smoothly.

However, Mark Calabria, the most recent nominee to become FHFA (Federal Housing Finance Agency) director may decide he doesn’t like government purchasing 30-year fixed mortgages. If the order comes to stop buying those loans, the un-doing of Fannie and Freddie could take place. These two organizations back the majority of all 30-year mortgages out there. When the market becomes far less liquid, the prices either shoot up or those type of loans will no longer be favored. This could push them to extinction over time.

This seems like a huge shift, and it would be, but it is very possible.

So If Not 30-Year, Then What?

If this happens then a likely spike in interest rates would make the current 30-year fixed mortgage loans far less competitive and thus far less appealing. Some think these massive shifts in interest rates or changes in interest could result in a shift to ARMs.

Without the stability and backing that Freddie & Fannie bring to the table, these don’t become the easy access good deals that homeowners have enjoyed in the past, and it makes them scarier investments.

If this situation was to play out, there’s a good chance that 5/1 ARM or 7/1 ARM loans would become about as attractive an option (or an even better option) than any new 30 year rate that would be made available. These could get even better if investment interest in 30-year fixed rate loans dried up after the changes. Banks won’t keep putting out loans that there’s no investment interest in.

While this would be a huge change, it is worth noting that the 30-year fixed mortgage is rare or a huge minority of home loans in many advanced economies like the UK, Ireland, the Netherlands, Canada, South Korea, and Spain. So other options are viable, even if the transition appears to be a bit rough at first glance.

Before making a decision, let one of the experts at The Texas Mortgage Pros help you find out exactly what loan is best for you.  Contact us today Or Call Us @ (866) 772-3802 Click here to go to the next article in this series.

What Is An Interest Only Mortgage

Interest Only Mortgage Loans

An interest-only mortgage does not decrease the principal loan amount but rather the installments only cover the interest charged on the loan amount every month. This basically means that you will always owe the same amount to your loan provider as you are only paying the interest. Where there is a small niche market for these type of loans, they are not for everyone.

These type of loans are secured by the property that has been purchased. Although there is an option to pay more than the interest, this option is rarely taken. An interest only mortgage is popular due to the fact that it greatly reduces the monthly installment on the mortgage. However, these types of loans do have a bad reputation and are often made out to be high risk. Just like most types of mortgages, this type of property financing option does have both advantages and disadvantages and when used correctly under the right circumstances, can be highly rewarding.

How Does An Interest-Only Mortgage Work?

The principal loan amount is not taken into account when calculating monthly installments. Only the interest charged on the loan will need to be repaid on a monthly basis. For example:

A principle loan of $100,000 bearing 6.5% interest amortized over a 30 year period would result in a monthly repayment of $627 including both the principal and the the interest (P&I). The interest portion of this amount would be $541.50. This would result in a monthly saving of $85 when taking an interest-only loan.

Different Types Of Interest Only Mortgages

Most types of mortgages that provide an interest-only option do not have an unlimited term. In other words, you cannot continue to only pay the interest forever and after a specified period of time, the principal loan amount becomes fully amortized over the remaining term of the loan. For example, a 5/25 mortgage would allow for interest only payments for the first 5 years of the 30 year term and there after the principal loan amount will be amortized over the remaining 25 years of the original term when both interest and principal amount will form part of the monthly repayment.

To give you a better idea of how this works, look at these to popular options:

  • A 30 year mortgage with the option to pay only the 6.5% interest for the first 5 years on a principle loan amount of $200,000 will result in repayments of $1,083 per month for the first 5 years and $1,264 for the remaining 25 years of the term.
  • A 40 year mortgage with the option to pay only the 6.5% interest for the first 10 years on a principle loan amount of $200,000 allows for an interest-only payment in any chosen month within the initial 10 year period and thereafter, installments will be in the amount of $1,264 for the remaining 30 years of the term.

How To Calculate An Interest-Only Payment

It is easy to calculate interest on a mortgage:

  • Multiply the principal loan amount by the interest rate. In the above example, this would be $200,000 multiplied by 6.5 which is $13,000 in interest annually.
  • Divide the annual interest by 12 months and you arrive at your monthly interest payment on your mortgage. $13,000 divided by 12 equals $1083 which is what you will pay in interest on a monthly basis.

How Can You Benefit From A Interest Only Mortgage?

An interest-only loan is ideal for a first-time home buyer. Most new home buyers do not have the available income to afford to repay a conventional mortgage and therefore opt to rent rather than purchase.

The option to pay the interest-only in any given month provides the homeowner with some financial flexibility when it comes to unforeseen circumstances. In other words, the homeowner does not pay only the interest every month but can choose to do so when they need to during a month of financial difficulty or where an emergency has arisen that prevents them from making a full repayment.

Self-employed individuals or commission earners who do not earn a stable monthly income can also benefit from these type of loans. In high earning months, they can pay more towards the principal amount and in low income months, opt to pay only the interest on the mortgage.

What Does It Cost?

Due to the slightly higher risk that a loan provider may run in offering an interest only mortgage, these type of financing options are often a little more expensive than traditional mortgage options. Most often, the difference is as little as 0.5% in the interest charged on the principle amount.

Additional fees and charges may also apply as may a percentage of a point on the principal amount in order to grant the loan.

Misconceptions And Real Risks

The balance owed on the mortgage will never increase as it does with ARM loans. Increasing the balance is referred to as negative amortization and does not apply to interest-only mortgages.

The greatest risk is when it comes to selling a property which has not appreciated in value. If the principle amount has not been reduced due to paying interest-only, the loan amount will not have changed and therefore the full amount will become due. This will mean that the homeowner will run at a loss.

On the other hand, it is important to note that this is a risk that is run when taking out a conventional mortgage. It is rare that a loan will cover the costs of a selling a property that has not appreciated in value. A significant down-payment will reduce the this risk factor on an interest-only mortgage.

A drop in the property market can result in the loss of equity on the property. Once again, the risks associated with a decline in the property market is run by all homeowners whether they opt for an interest-only mortgage or a home loan that is fully amortized.