With foreclosures rising across the state and nation, the National Association of Realtors recently released a press released. It focused on the borrowers most likely to default on their Florida home loans: those with adjustable-rate mortgages.

Here are pieces of advice from it:

Contact the lender: Homeowners facing foreclosure often make the mistake of avoiding the lender, which is exactly the wrong thing to do. Contact the lender early, explain your situation, and find out your options.

Contact family members or friends: Ask for help. If you were in a position to assist a family member or friend who was facing a similar situation, how would you feel if they didn’t ask you for help?
Reinstate the mortgage: If you can come up with enough cash to bring Florida mortgage payments up to date, the lender may agree to hold off on foreclosure proceedings.

Negotiate a forbearance: Your Florida home loan officer may be willing to restructure your payments to help you get back on track after a temporary financial setback.

Refinance out of foreclosure: With a good credit history, you may be able to consolidate your debt with a loan that requires a total monthly payment of less than you’re paying on all your other loans put together. This is why you should speak to our brokers today about Florida mortgage refinancing.

Sell your home: If you owe less on the home than what you can sell it for, sell the home and find more affordable accommodations. Selling the home is what 90 percent of those who are facing foreclosure really need to do, but unless you act quickly, you may run out of time.

Negotiate a short sale: Lenders typically want to avoid foreclosing because it costs them money. You may be able to convince the lender to accept less than the total amount owed on the Florida mortgage loan.

Giving a deed in lieu of foreclosure: If you owe much more on a house than what you can sell it for, you may be able to offer the lender the deed in exchange for them not foreclosing on you. You lose the house but retain your credit rating.

File for bankruptcy: Bankruptcy is rarely the best choice. In most cases, it simply buys you some time, but is often the most costly option.

Do nothing: Doing nothing is, by far, the worst option. It ultimately leads to losing your home, any equity you may have built up in that home, and compromising your ability to qualify for future loans.

If you have an adjustable rate Florida mortgage loan - where your monthly payments are about to ratchet up steeply or you are dangerously close to having a negatively amortized loan - the low rates on the 30-year fixed-rate loans this month offer you a window of opportunity to lock in a low rate long term.

There may be some payment shock if you’ve been in an ARM, “but it will be less than if you wait,” said Bob Visini, Loan Performance’s vice president of marketing.

Here are five cost-effective steps that Wachovia mortgage banking executive Blair Glenn and George Hanzimanolis, president-elect of the National Association of Mortgage Brokers, recommend if you choose a Florida home loan refinance:

1. Ask your original lender if you may modify (or recharacterize) your loan into a fixed-rate mortgage. With fees that range from $250 to $500, this process is less costly and less intensive than a full refinancing - which typically runs between 0.5 percent to 2 percent of the loan amount.

But a modification may prove more expensive in the long run if the fixed rate your lender offers is more than three-quarters of a point above the going rate you’d get on a regular refi. So make sure you shop around for the best Florida mortgage rates and closing costs.

2. Consider whether it makes sense to buy points. Points are money you pay up-front to lower the fixed rate on your mortgage. If you think rates will fall and you’ll refi again soon, it may not make sense to buy points. But if you think rates are as low as they’re going to get for awhile, it might save you a lot of money long term to lower your rate today.

3. Ask to pay the “reissue” rate on your title insurance in a refi. It costs about 20 percent less than the standard title rate on new Florida mortgages.

4. Opt for a full appraisal, even if your lender only requires a “drive-by appraisal.” A drive-by means an appraiser doesn’t even inspect the home in person. A full appraisal costs more (about $300 vs. $150), but your home’s value will be more accurately assessed.

Because a sale may be contingent on your home’s assessed value and it determines how much you can borrow against your home and how much you’ll pay in property taxes, accuracy is important.

5. Don’t pay an application fee. A lot of companies are waiving that fee, so you shouldn’t be subject to it.

Robert J. Bruss, a lawyer and real estate broker, replies to inquiries about housing and mortgages in his syndicated column.

In his most recent Q & A session, he addresses interest-only mortgages — something many of us in Florida know all too well about. Are they all bad? When would they be a good option, if ever? The answer may surprise you. Let’s take a look at what Mr. Bruss has to say about these exotic Florida home loan financing options.

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Q: I have around $300,000 equity in my home. My current mortgage balance is only about $34,000. Although I am retired and in good health, I am “only” 64, so a reverse mortgage won’t give me much because I am too young. I have a decent retirement income, but not enough to afford to go with my friends on cruises and afford other frivolous expenses.

The banker at my community bank, where my late husband did business for many years, suggests I get a 30-year fixed-rate mortgage with “interest only” payments for the first 10 years. There is no negative amortization, which you often warn about. He says I can easily afford the monthly payments, even after they “adjust” in 10 years to pay off the loan in 20 more years. My children advise against it. Your opinion, please!

A: Go for it! Enjoy your home equity. It is possible that your children realize you will be spending what will be their inheritance so they want to discourage you from fully enjoying your retirement while you are still in good health. There is nothing necessarily bad with interest-only mortgages that don’t have negative amortization.

Basically, from how you’ve described it, the Florida mortgage option you have in front of you sounds ideal as long as you can afford the monthly payments on your retirement income, both now and in 10 years when the monthly payment adjusts.

The type of mortgage that gets homeowners in financial trouble is the so-called “option ARM” where the monthly payments are so low they don’t even pay the interest. When that happens, the lender adds the unpaid interest to the Florida mortgage loan balance, resulting in negative amortization where the borrower owes more than the original balance.

Thinking about Florida mortgage refinancing to a fixed rate? Consider this story:

Keith and June Forstrom reaped the benefits of adjustable-rate mortgages during the last few years. But now they’ve traded in their one-year ARM, with monthly payments of $1,060, for an old-fashioned 30-year fixed-interest loan.

The Forstroms refinanced out of the interest-only loan of $203,000 last month on their two-bedroom patio home. They chose a 30-year fixed loan of $125,000 with a slightly higher rate.

Now they’ll have more predictable monthly payments of $933. This, of course, is the idea for anyone that wishes to refinance a Florida home loan.

“We realized that rates could very well go up, and we didn’t want to be stuck with that,” said Keith, 75, a retired real-estate broker.

Advantages of Florida home mortgage refinancing

Some homeowners who rushed into ARMs during the previous five years - taking advantage of some of the lowest interest rates in decades - are now converting those loans as their rates adjust upward.

Consider: Interest rates on 30-year fixed Florida home loans are close to or higher than rates on some ARMs that are resetting after an initial fixed-rate period.

The Mortgage Bankers Association reported Wednesday that the gap between the average interest rates on a 30-year fixed loan (6.18 percent) and an ARM with a one-year fixed rate (5.9 percent) is the narrowest it has been since January 2001.

Meanwhile, ARMs have risen more quickly as the Federal Reserve has lifted short-term rates since mid-2004. ARMs, whose rates typically rise after three to seven years, have declined as a share of all refinancings, according to the mortgage bankers group.

“A lot of people are going to feel the full effect of all these rate increases when their mortgages reset,” said Greg McBride, senior financial analyst for Bankrate.com, based in North Palm Beach, Fla.

Not everyone, however, thinks refinancing out of an ARM makes sense now.

Should you consider Florida home loan refinancing?

Broker Mike Thomas of Hyperion Capital Group in Aurora said most ARMs have a cap restricting how much the interest rate can rise in one year.

Rates were so low in 2003 and 2004 that most three-year ARM rates being reset are still under 6 percent. Borrowers may be better off staying with their ARM and seeing what the Federal Reserve does with rates during the next 12 months.

“Sometimes it’s better to ride it out and wait,” he said.

Overall, mortgage lending activity has fallen 21 percent during the last year. Moreover, the trend away from ARMs is being fueled in part by Florida mortgage brokers. Many ads tout 30-year rates rather than the low ARM rates.

“I don’t remember the last time I sold an ARM,” said Tim Glaser of 1st Community Trust Mortgage in Greenwood Village, who refinanced the Forstroms.

Some brokers are calling former clients offering to get them out of their ARMs.
David Hutton, sales manager with Paragon Mortgage Services in Denver, recently persuaded Lakewood homeowner David Anderson to refinance by showing him he could save $200 a month.

Anderson said the monthly payment on his option ARM started at about $1,200 in early 2004 but is now nearly $2,000. Hutton arranged for a 30-year fixed loan that will reduce Anderson’s payment to roughly $1,800, including a one-time $1,200 prepayment penalty on his old loan.

“The adjustable rate was real good for us at the time, but it’s gone up,” Anderson said. “Who knows where it’s going to go from here?”

When it comes to non-traditional Florida home loans, critics abound. Many professionals believes these mortgage products cause more harm than good - whether or not this is the case, borrowers are likely to continue using them as means toward property purchasing ends.

With in mind, here’s a look at various Florida home mortgage resources that you may be considering:

Interest-Only Payment

An interest-only payment is equal to the amount needed to repay the interest due each month. Just like any other interest-only loan, you’re not paying any principal balance for a certain time period, just enough to cover the interest.

15-Year and 30-Year Amortization Payment

If you decide to make the 15-year or 30-year amortization payment, you’re paying an amount that is needed to pay off your loan in 15 or 30 years (respectively) from the date you closed your loan. The 15-year payment is the higher of the two and it pays down your loan’s principal balance the quickest.

Minimum Payment

This is the lowest payment option and covers an amount less than what it would take to pay the full interest in a given month. For example, if you have a $100,000 Florida home loan at 6.25 percent, the interest equals $520.83. Depending on how your minimum payment is calculated, your minimum payment would be less than that.

Generally speaking, your minimum payment may change each year, but it can only increase a certain percentage of the previous year’s minimum payment amount. Every five years, your loan gets recalculated. After each recalculation, your new minimum payment is based on your current interest rate, your unpaid principal balance and your remaining term.

Benefits of Option ARMs

Why apply for an An option ARM? It can give you the benefit of a lower rate because it’s an adjustable rate Florida home mortgage. Moreover, you have the ability to choose which type of payment you want to make, depending on your financial situation for a given month.

The minimum payment can significantly help you if you need more cash for other things, such as consolidating high-interest credit card bills or investing more in your 401k. The 15-year payment can help you pay off your loan faster, if that’s your goal. Various advantages abound.

There are many option ARMs available. If you’re considering applying for one - and many lenders don’t believe Florida mortgage loans such as this cause problems - talk with a broker today. Our cost-free form atop this page can help.

Some lenders seem to think that exotic, or non-traditional, Florida home loans have almost no negative consequences. And they have facts to back that view up.

But others not only believe these types of mortgages are harmful for consumers, they postulate they can have far-reaching, negative consequences that affect banks and investors, too. An article in Business Week makes just such a point.

The effects of non-traditional Florida home mortgages

According to the article, Nightmare Mortgages, Wall Street - and especially hedge funds - have also bought these loans and the risks associated with them. To paraphrase it a bit:

“The [option adjustable rate Florida home mortgage] might be the riskiest and most complicated home loan product ever created. (It) brought a whole new group of buyers into the housing market, extending the boom longer than it could have otherwise lasted.”

However, the article continues, there was more going on behind the scenes. Brokers were paid more to sell option ARMs than other mortgages, while lenders were allowed to claim the full monthly payment as revenue, even if the borrower paid the minimum and the loan’s interest rates and fees might have been set by hedge funds rather than the banks.

The article claims that banks don’t have to report on the number of these option Florida home loans they have written but they represented “at least 12.3 percent (of all mortgages written) during the first five months of this year.” Interesting information.

Option Florida mortgages worsening housing market?

Not only did these exotic loan products prolong the boom, they may well worsen the bust. The article states:

“They also betray such a lack of due diligence on the part of lenders and borrowers that it raises questions of what other problems may be lurking. And most of the pain will be borne by ordinary people, not the lenders, brokers, or financiers who created the problem.”

However, while the author of Nightmare Mortgages feels that “ordinary people” will bear the pain, it’s not prudent to overlook the fallout that may affect investors and banks. If lenders are actually booking non-existent payments and then are hit with massive defaults with no hope of recovery,there could be devastating damage in the future.

Hopefully, this isn’t the case - but the option national and Florida mortgage loan is not necessarily a product whose time has come and gone. Despite the housing slump, these mortgages totalled $77.1 billion in the second quarter this year.

If certain reports are valid, there’s less risk involved to those with non-traditional Florida home mortgage loans than may have been previously believed. Nevertheless, it’s often in your best interest to refinance to a fixed-rate mortgage before rates reset and foreclosure is even a remote possibility.

With that in mind, Colleen Hernandez, president and executive director of the Homeownership Preservation Foundation, offers the following advice:

• Look through your Florida home mortgage contract. This should clearly spell out the terms under which your loan will adjust.

• Avoid being surprised. Lenders must inform you before your rates adjust and your payments change, but this may not give you enough time to change your personal budget. Ask your lender the details of when the loan will adjust and how much more you will be paying per month. You’ll then be able to plan ahead.

• Look at your budget. Once you learn how much your Florida mortgage loan payment will adjust, take a hard look at your entire financial picture. Can you afford this payment easily? Has your situation changed to make it close to impossible for you to avoid missing payments?

• Work with your lender. If you find that your new payment is more than you can or want to handle, or even if you have already missed some payments, you can work with your lender to determine what your options are. “Despite myths to the contrary, it is in your lender’s best interest to keep you in your home,” advises Hernandez. “Your lender may be able to help you refinance your loan, offer a manageable repayment plan or one-time grant, or take other steps to help you continue to make your payments.”

Even if the situation isn’t as dire as you once feared, it’s important to understand every aspect of adjustable Florida home loans. Hope for the best and for rates to remain reasonable, but prepare for the worst just in case.

It’s not the best time to possess an adjustable rate Florida mortgage loan. As a recent study by the Association of Community Organizations for Reform Now (ACORN) depicts, a slew of owners have taken out these types of home loans.
And recent interest rate hikes could make it financially dangerous to be included in this group.

In the survey, ACORN noted that, while adjustable rate Florida home loans represent about 24 percent of all mortgage nationally, in some communities and among some demographic groups they account for a much larger percentage of the mortgage pool. Moreover, ARMS make up about 75 percent of all sub-prime loans, a 50 percent increase since 1999.

Adjustable rate Florida home mortgage loans: The popularity and danger

The report stated that “until this year there has been little recognition of the prevalence of adjustable interest rates in sub-prime loans and the danger posed by these ARMS.” The focus instead has been on predatory lending practices such as excessive fees, high interest rates, and balloon payments.

Sub-prime loans are generally tailored for a market where people cannot obtain a conventional loan at a standard rate, but Freddie Mac and Fannie Mae have estimated that at least one-third of sub-prime borrowers could actually have qualified for a lower cost mortgage. Therefore, it would seem that a “large number of the borrowers who have received ARMS should not have been in the sub-prime market.”

They were taken advantage of.

The ACORN study found 32 markets where at least one out of three loans given out was high cost and thus subject to rate reset shock. In ten of these markets, high cost loans represented two-fifths of the home purchase and refinance mortgages. Fortunately, none of the markets included were located in Florida.

The borrowers affected by these mortgages have certain things in common, as well. ACORN found that minority neighborhoods are at a great risk of payment shock because of the extent of high cost loans. More than half of the high-cost refinance loans in 67 of the areas examined in the study were in minority communities.

However, the risk was not limited to the low income in minority areas. Upper-income minority borrowers were found to be at greater risk than white borrowers of similar income. In 12 metropolitan areas, upper-income African-Americans were at least three times more likely than their white counterparts to receive high-cost refinance Florida home loans and in 15 metropolitan areas upper-income African-Americans were at least five times more likely to receive a high-cost purchase loan than upper-income whites.

In other words: it’s a class - not race- issue.

Why are these Florida home loans so risky?

The ACORN report cited the phenomenon of “layered risk” where high cost loans are layered with multiple features, such as interest-only requirements, prepayment penalties and option payments. Lenders are also offering low initial “teaser” rates which adjust to higher rates after the initial “introductory” period.

The study quoted a Federal Reserve report that found an estimated 35 percent of ARM borrowers did not understand the maximum amount their Florida mortgage rate could rise at one time or even how to calculate what the maximum rate would be. This is certainly a problem.

Borrowers with prepayment penalties and minimum equity may be unable to be approved for a Florida home loan refinance. The study quotes research by First American Real Estate Solutions that up to 1 million households are in danger of losing their homes through foreclosure over the next five years because they will not be able to afford new payment levels and will owe more on their homes than they can recoup through a sale or refinance.

Such an impact of rate reset shock may be concentrated in certain metropolitan areas, neighborhoods, and among certain demographic groups. But it’s something EVERYone with a Florida home mortgage needs to bear in mind.

We’re entering the period where rates on billions of dollars in adjustable Florida home mortgage loans will reset. As a result, countless individuals are wondering about the state of their finances and asking themselves whether or not refinancing into a fixed rate is in order.

It’s an important question.

The decision to refinance out of a 5/1 adjustable rate mortgage, for instance, into fixed rate product depends on how long you plan on being in your house, your attitude toward risk and your outlook on interest rates.

If this is a starter home or you plan to downsize in the next three to five years, then staying in a 4.5 percent loan over the next three years makes perfect sense. If you don’t ever plan on moving, however, then you should at least consider Florida home mortgage refinancing while 30-year fixed rates are still under 7 percent.

There’s more to consider on the topic.

Let’s say your mortgage has an annual cap of 2 percent and a lifetime cap of 9.99 percent; it would be at least 2010 before your Florida mortgage rate could hit 8.5 percent. While that’s about 1.75 percent higher than current 30-year fixed-rate mortgages, you’re not paying any refinancing costs or expenses to stay in your current situation. What’s the worst that can happen?

Your loan could go to 9.99 percent in 2011 and stay there for the rest of the Florida mortgage loan term. That’s not inconsequential, but isn’t relevant if you don’t plan on staying in the house.

Let’s do some more math.

It’s a rough approximation, but if your loan balance is currently $100,000, refinancing a 4.5 percent loan three years before it becomes an 8.5 percent loan costs you $8,000 per year over the next three years. That’s $24,000, plus closing costs. Refinancing today at 7 percent will cost you an additional $7,500 over the next three years, versus the existing mortgage, plus closing costs. The interest expense is scalable, so a $200,000 loan balance would be twice as much, plus closing costs.

Overall, keep an eye on the 10-year Treasury note. It’s used as the benchmark in pricing fixed-rate mortgages. It’s been in a range from 4.75 percent to 5.25 percent since March of 2006.

The bottom financial line, though, is this: if you’re not in this house for the long term, don’t get overly concerned about Florida mortgage refinancing your 5/1 ARM or any similar, exotic products.

Regulators are concerned about them - but buyers don’t seem to be.

We’re referring to option adjustable rate Florida home mortgages, types of loans whose popularity has soared during the first five months of the year.

An option ARM is an adjustable-rate mortgage that gives borrowers multiple payment choices each month, including a minimum payment, an interest-only payment and a standard Florida home mortgage payment. The loans often feature a low introductory rate that is used to set the minimum payment in the first year. Hence, the appeal.

Allure of these Florida home loans

Many borrowers have been attracted to these loans because of their low introductory rates, which have run as little as 1%. But borrowers who elect to make the minimum payment can be hit with a rising Florida mortgage loan balance. They can also face trouble down the road, when their monthly payment resets. Roughly 75% of borrowers with option ARMs are currently electing to make the minimum payment.

According to a new study by LoanPerformance, option ARMs accounted for 12.3% of mortgage originations through May, up from 8.4% in all of 2005. The study looked at loans sold to investors that buy mortgage-backed securities.

The loans’ popularity occurs as rising Florida mortgage rates are making them less attractive. Many lenders have boosted their introductory rates to 2% or more. Once the introductory period ends, the true interest rate on the loan can be more than 7%, well above the current 6.64% average rate on 30-year fixed-rate mortgages.

“It’s hard to know why anybody would want [an option ARM] in the current rate environment,” says Keith Gumbinger, a mortgage analyst with HSH Associates. Yet borrowers seeking to lower their monthly payments have few other choices. Given the narrow difference between short- and long-term interest rates, Mr. Gumbinger says, “there are very few products that … provide payment relief.”

Florida home loan problems

There already are signs that some borrowers who took out option ARMs are running into trouble. Foreclosure rates for option ARMs “are rising fast,” although they are coming off very low levels, according to a report issued last month by Credit Suisse Group. Option ARMs are going into foreclosure an average of 10 months after the loan is made, earlier than for other types of loans, and that is “a cause of concern,” the report stated.

Federal bank regulators have proposed guidelines for nontraditional Florida home mortgage resources that would require lenders to provide more disclosure, while tightening up their lending requirements. There are concerned that borrowers who take out these loans may not fully understand the terms and potential risks involved.

Despite their downsides, option ARMs have been particularly popular with borrowers who are Florida mortgage refinancing. They accounted for roughly 17% of refinance transactions nationwide through May, according to the LoanPerformance analysis, and nearly 37% of refinances in California.

Fewer people have been choosing interest-only mortgages, which allow borrowers to pay interest and no principal in the loan’s early years. Such mortgages accounted for 21.6% of loan originations, according to the LoanPerformance analysis, down from 26.2% last year.

Evidently, forty-year Florida home loans have replaced interest-only loans as the “affordability mortgage du jour” for borrowers with blemished credit records, says David Liu, a director in UBS’s Mortgage Strategy Group. Subprime interest-only loans have come under pressure from credit-rating agencies and bank regulators.

Overall, some of these options can be helpful sometimes. But there are better ways to improve your credit rating and receive approval on a safer Florida mortgage loan.