Do 500 People Speak For The Whole Country?

On the week, mortgage rates are slightly improved as traders keep a watchful eye on tomorrow’s Retail Sales report.

Largely, markets want to know how Americans are using their disposable income.  Are they buying big-ticket items like automobiles?  Are they buying luxury items?  Are they buying appliances and home goods?

Retail Sales is released at 8:30 A.M. ET Friday.  Later that morning, markets will digest the University of Michigan Consumer Sentiment survey. 

This report asks 500 consumers how they feel about the economy and their personal finances and extrapolates those answers to estimate how consumers are likely to spend in the future.

The UofM Survey is helpful, but not rock solid. 

Since January 2007, the gauge has declined from 96.9 to last month’s 86.0 reading.  That would foretell a slowdown in spending nationwide, but so far this year, that hasn’t been the case.  People may know that they shouldn’t go spending, but they’ll often do it anyway.

Retail Sales are a better economic indicator because it measures facts and not feeling.  Economists are expecting a flat reading tomorrow.  If the number is on the weak-end, expect mortgage rates to fall.

Source
Reuters: Customer Zone – Reuters/University of Michigan Surveys
http://customers.reuters.com/community/university/default.aspx

Interest-Only and Option ARM’s: The Risks – Part 3

The risks associated with I-O mortgages and payment-option ARMs?

Rising monthly payments and payment shock

It is risky to focus only on your ability to make I-O or minimum payments, because you will eventually have to pay all of the interest and some of the principal each month. When that happens, the payment could increase a lot, leading to payment shock. In the worksheet example yesterday (part 2), the monthly minimum payment on the option-ARM payment rises from $630 in the first year to $1,308 in year 6, assuming the interest rate stays at 6.4%. The monthly payment could go up to $2,419 if interest rates reach the overall interest rate cap.

Negative amortization

If you have a payment-option ARM and make only minimum payments that do not include all of the interest due, the unpaid interest is added to the principal on your mortgage, and you will owe more than you originally borrowed. If your loan balance grows to the contract limit, your monthly payments would go up. For example, if your $180,000 loan grew to $225,000 (125% of 180,000), your payments would be recalculated.

Refinancing your mortgage

You may be able to avoid payment shock and higher monthly payments by refinancing your mortgage. But no one knows what interest or appreciation rates will be in 3, 5, or 10 years. If your loan balance is greater than the value of your home, you may not be able to refinance.

Prepayment penalties

Some mortgages, including I-O mortgages and payment-option ARMs, have prepayment penalties. So if you refinance your loan during the prepayment penalty period, you could owe additional fees or a penalty. In the Mortgage Shopping Worksheet example, the penalty is 3% in the first year, 2% in the second year, and 1% in the third year. In this case, you could owe $3,600 if you refinance in year 2. Most mortgages let you make extra, additional principal payments with your monthly payment. This is not considered “prepayment,” and there usually is no penalty for these extra amounts.

Falling housing prices

If housing prices fall, your home may not be worth as much as you owe on the mortgage. Even if home prices stay the same, if you have negative amortization, you may owe more on your mortgage than you could get from selling your home. Also, you may find it difficult to refinance. And if you decide to sell, you may owe the lender more than the amount you receive from the buyer.

Links to previous articles in this series:

• Interest-Only Mortgages and Option-Payment ARM’s: Part 1
• Interest-Only and Option ARM’s: Understanding Them- Part 2

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Tony Gallegos - Serving the mortgage needs of Kennesaw, Marietta, Roswell, Smyrna, Powder Springs, Dallas, Acworth, Woodstock, Douglasville, Hiram, Austell and Atlanta. Subscribe to The Mortgage Cicerone:

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