Q: "My loan officer has told me that on a 5/1 adjustable-rate mortgage (ARM), paying $1,000 more each month for 60 months won’t generate any savings over paying $60,000 in month 60, just before the interest rate and payment reset. Is this true?"
A: No, he is wrong. If you pay an extra $1,000 a month for 60 months, the loan balance will be smaller in month 60 than if you applied $60,000 to the balance in month 60. The reason is that extra payments received early reduce the balance early, which reduces the monthly interest due on all future payments, which increases the portion of all future payments that is applied to principal.
The higher the interest rate, the larger the savings. For example, at 5 percent, paying an extra $1,000 a month on a $300,000 loan will result in a loan balance 3.7 percent smaller after 60 months than applying $60,000 to the balance in month 60. At 10 percent, the balance would be 7.6 percent lower.
This principle holds whether the loan is an ARM or a fixed-rate mortgage (FRM), whether it is a standard monthly accrual mortgage or a simple interest (daily accrual) mortgage, or whether the scheduled payment is fully amortizing or interest only.
The only kind of mortgage on which it would not hold is one on which the loan contract prevents the borrower from making extra payments, and to my knowledge there are no such home mortgages in the U.S.
Mortgage insurers are not obliged to help distressed borrowers, but they might anyway
Q: "I am currently in default on my mortgage. I have been paying premiums to a private mortgage insurer for six years; is there any way these premium dollars can be applied to my mortgage payment?"
A: Mortgage insurance protects the lender, not the borrower, and you have no legal claim on the premiums you have paid. However, your insurer is on the hook for losses if your default ends in foreclosure, which means that it has a financial interest in preventing this from happening.
All the insurers have programs under which they will assist borrowers in distress who they believe can avoid foreclosure with their help. Contact your insurer ASAP.
Responding to solicitations from mortgage lenders is a bad idea — even worse if the lender is abroad
Q: "I am currently involved in trying to get an overseas mortgage from an online company abroad, XXXX.com. I have already sent them 300 euros for an automated valuation in France; I was supposed to receive it two weeks ago, but it has not yet arrived. I’m worried. Can you please tell me what you know about XXXX.com?"
A: I don’t know anything about them, which is hardly surprising, There are many thousands of mortgage loan originators in the U.S. alone, and adding Western Europe might double the number.
Borrowers who allow themselves to be selected by a lender are looking for trouble. Not all lenders who solicit borrowers are predators, but all predatory lenders solicit, which means that the odds are stacked against the borrower responding to a solicitation. If the soliciting lender is abroad, the odds are even worse.
The analogy I like to use is selecting mushrooms. One summer in New Hampshire, I camped in a wood that was carpeted with wild mushrooms, which I love, but many of them were poisonous.
I went to the local "expert" who knew some that were good that he had eaten, and those were the ones I picked. There are a lot of pretty mushrooms I left alone, and would have left alone even if they had implored me to pick them. That is the proper way to select a mortgage lender.
In the post-crisis market, some lenders will not do condo loans
Q: "I have been preapproved for an FHA (Federal Housing Administration) loan, but the lender says that it is not (valid) if I purchase a property that has an HOA fee. Why is that?"
A: It is a roundabout way of telling you that this lender does not make loans on condominiums, since all condominiums have a homeowners association (HOA) fee. Many condominium projects have been having trouble collecting these fees from members, especially where significant numbers are in default on their mortgages.
This may result in needed maintenance not being made, which can erode the value of all the units in a project. It can also impose an additional financial burden on residents who are not in default, who may be obliged to pick up the HOA fee shortfall.
On the other hand, many condominiums have no HOA fee shortfalls and are well maintained, making the individual units excellent collateral for a mortgage loan. Your lender does not want to do the homework needed to identify the condos that are good risks. Say goodbye and look to another lender. Giving up the preapproval means giving up what has no value to you.
Even FHA borrowers have a right to change their minds about where they live
Q: "I am thinking of refinancing into an FHA loan in order to take some cash out for home improvement. My intent is to stay in the house, but there is a possibility that I may need to move out in seven months or so and rent this house before moving back in at a later time. Can I do this?"
A: FHA loans are for permanent occupants, not investors. However, people are allowed to change their minds in response to changed circumstances, so if you are obliged to rent it out at some point, nobody is going to throw you in jail. In my view, the fact that you anticipate that this could happen does not invalidate your declaration that you are buying the house as your permanent residence.
Note that the loan application does not ask you about possible future changes in your lifestyle and there is no reason for you to bring it up.