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If you are one of the many people who has purchased home in recent years utilizing adjustable rate mortgages, you may want to take a good look at your next mortgage statement. Many niche ARM products allow borrowers to choose the payment they wish to make every month. This is especially common with interest-only type products.

As interest rates began to creep upward, if you continued to make the same minimum interest-only based payment, you may discover that your loan balance is bigger now than it was when you bought/refinanced the property. When you make only minimum payments, which often doesn’t even cover all the monthly interest, let alone any principal, the amount you underpay each month is added to the loan balance by the lender.

The result: if you’re not careful, you could find yourself owing more on the property than you originally paid for it, especially if you purchased with 100% financing.

The remedy: look at your mortgage statement every month. Make sure your monthly payment covers all interest and preferably something to the principal, even if it’s only $10 or $20 a month. This will ensure that you are keeping up with your interest charges and reducing your principal balance a little too. Even small amounts, paid regularly, can whittle away the principal on your loan.

This can prevent you from experiencing the potential risk of negative amortization.

With property shortages, greater demand and rising prices, in some real estate markets competition for homes is so high, realtors and buyers are adding escalation clauses to sales contracts. What is an escalation clause?

In a contract for sale an escalation clause stipulates that, after the prospective buyer makes his/her offer on a particular property, they are willing to increase their offer by a specified dollar amount if the seller receives a more attractive offer. This only applies until the contract for sale is ratified by all parties.

Here’s the way it works: a seller places his home on the market for $400,000 and a prospective buyer makes an offer of $400,000. Buyer A is the first to make a full price offer on the property and the seller is entertaining the offer. Along comes Buyer B, knowing that another offer is already out there, Buyer B offers $410,000. Since Buyer A included a $25,000 escalation clause in his contract offer, the seller knows that Buyer A will match Buyer B’s offer up to the $25,000 limit. In order for Buyer A to commit to the higher price, the seller must provide proof that the higher offer was formally made. Once an offer has been accepted by the seller, and the contract has been ratified by all parties, the price is fixed even if another higher offer is made later.

The purpose of an escalation clause is to ensure that a prospective buyer who gets his bid in first is able to maintain his advantage even if another, higher offer comes in later. In areas where there is a shortage of property available and/or people are on very tight schedules for moving/relocating, an escalation clause can mean the difference between having a house to buy or being forced to rent an apartment.

Job transfers and/or changes can create many logistical problems for buyers in any circumstances, add to that a short supply of available houses, many families find themselves facing living in smaller quarters with the majority of their possessions in storage. Utilizing an escalation clause can help a prospective buyer have confidence that s/he can get the contract before s/he is outbid by another buyer.

Regulators have mandated that credit card issuers increase their minimum payments to ensure individuals are paying toward their principal balance each month. This means minimum payments could more than double for some individuals.

When reviewing the debt-to-income ratios (see earlier post on Qualifying Ratios), mortgage lenders calculate debt ratios based on the minimum payment required on any credit cards. If those minimums suddenly increase, many potential homebuyers may find they no longer qualify for the mortgage they want.

Right now, most companies set minimum payments at about 2%. Unfortunately, if you carry a high balance and have a rate over 20%, that probably doesn’t even cover the interest owed for the month. Your balance then increases each month by the amount of interest your payment didn’t cover, making it impossible to ever pay the debt off making minimum payments.

Regulators want to change that. The new guidelines are designed to force lenders and their cardholders to reduce individual credit card debt each month by having minimum payments that cover not only the interest for the month but part of the principal balance too.

I recommend anyone with credit card debt look carefully at their current payment, figure any payment increase will be to at least 4% of the principal balance owed, and begin adjusting their monthly budget to accommodate the higher payment now. Then watch your monthly statement and/or mailings from the card issuer. They have to notify you 15 days in advance of any payment changes.

Then, if you are in the market for a new home, talk to your loan officer or mortgage broker. Find out if these increases will impact your ratios enough affect your qualification for the house you want. Talk to to them about loan options, expanded underwriting programs or those with higher allowable debt-to-income ratios. But also keep in mind, expanded loans programs may cost more in both lender fees and interest rate.

A cash-out refinance means a homeowner refinances a mortgage at a higher loan amount than the current loan balance in order to transform a portion of the equity into cash. The record low interests rates of recent years created a flurry of refinances as many homeowners refinanced to reduce their interest rate.

Recent reports, however, are showing a different trend. Cash-out refinances are increasing and homeowners are pocketing the increased equity properties are building as a result of the hot real estate market driving values up. So, where is the money going?

Many owners are re-investing in their properties, making improvements and adding up-grades. Just as often, homeowners are taking the extra equity and paying off other, higher interest rate debt, such as credit cards and auto loans.

Caution is advised to homeowners considering a cash-out refinance, however, as inflated values now could mean they end up with a bigger mortgage and no equity if market prices suddenly drop. If you are considering a cash-out refinance, you should carefully weigh your answers to the following questions:

1. What am I going to do with the cash? Will it improve my financial picture or weaken it? Will I still have equity in my property?

2. If debt consolidation is the purpose, am I truly saving money over the long-term or am I simply moving the debt around?

3. If the real estate market experiences an adjustment, will I have enough equity after the refinance to sell my home at a profit?

4. Is the appraised value being used for the refinance realistic if real estate sales slow down significantly?

5. If the purpose is to reduce or eliminate credit card debt, will I change my credit habits or am I likely to build up significant credit card debt again?

Only you can decide if a cash-out refinance is a good financial move or not. If you are unsure, talk to your financial advisor and discuss your options before you refinance.

It seems, unfortunately, because of the availability of loan programs intended to meet the needs of small business people or people whose income is majoritively commissioned based, a number of people are getting financing for homes they really can’t afford. Stated income loans were designed to help professional business owners who, because of their business, were unable to confirm all of their income. This can also apply to commissioned sales people, such as realtors, whose income can be sporatic, thereby creating an impression of “unreliable income” in the eyes of traditional underwriters.

What’s happened? Loan officers are getting buyers qualified for home purchases with these programs but both, the officers and buyers, are failing to be realistic about the buyers ability to service the debt.

In certain areas of the country, this practice has gotten out-of-hand. Utilizing the many loan options available today, homebuyers are portrayed as “lying” about income and assets to the point that the industry sees

“widespread and growing fraud in home loan applications, where sticker-shocked buyers lie [in order to qualify], according to Kenneth Harney of The Washington Post.

Harney also reports that “the FBI received more than double the number of mortgage-related suspicious activity reports from 2003 to 2004, and the problem is spreading from the biggest cities out into smaller metropolitan areas.

With stated income loans, buyers can qualify for higher loan amounts. In addition, interest-only loans can allow borrowers to maximize their debt-to-income ratios. The risk??? If the market turns, homeowners may find themselve in situations where they are unable to sell their homes for what they owe on them.

Homebuyers that are stating income beyond their true earning potential and making interest-only payments are risking their fiscal health. Ruination can be just a few missed paychecks away if you have minimized your loan obligation and maximized your debt exposure.

Be very careful of stated income loans and/or interest-only loans if they take you beyond your realistic financial profile. Everyone wants to own a nice home, but, just because your loan officer can get you approved utilizing these programs, doesn’t mean the property is affordable if it stretches you beyond your ability to maintain your financial well-being.