Specialty Mortgage Products - Pros and Cons

If you have a FHA or VA mortgage, you are eligible for a streamline refinance. A streamline refinance can be helpful if there is a sudden reduction in interest rates, because the borrower can quickly get approved without the typical underwriting process. There is no income documentation needed or asset guidelines. FHA insures the loan from the premise that if you have been making your payments at your current interest rate, then you certainly should be making them at a lower one.

You can even get approved for a streamline refinance, in some cases, without having to get another appraisal. However, if you choose the no-appraisal route, there is no cash-out option. The loan amount can only be as high as your current mortgage amount plus any closing costs and escrows. Many mortgage companies also offer another variation of the streamline refinance - a no cost streamline refinance. Although the interest rate is slightly higher than a typical streamline, the borrower does not incur any costs at all along with no underwriting guidelines or appraisal requirement.

FHA also has another wonderful product that not a lot of borrowers take advantage of called a 203k loan. A 203k loan is an FHA insured mortgage that allows borrowers to include the cost of renovating a house into the initial loan amount. The loans will work for one to four units of residential space as long as the borrower intends to live in one of the units. An example of a 203k loan would be a young couple looking to buy a home for the first time. They are able to find a fixer upper that needs about $25,000 in repairs including a new kitchen, bathrooms, hard wood flooring, and a new roof. The "as-is" purchase price of the home is $150,000. As long as the loan amount is not more than eighty percent of the after repair value then the deal would qualify for a 203k loan. The after repair value would be the appraised value of the home after the repairs are completed.

A third specialty mortgage product is the interest only mortgage. An interest only mortgage is typically the way to close on a property and pay the lowest monthly mortgage payment because you are only paying interest on the loan and not paying any of the principal down. Although this can dramatically lower the monthly payment, an IO product should be avoided in most scenarios. Traditionally, an interest only product was for those that only planned to own the property for a very short amount of time (under 3 years). Most likely, the borrower was going to be rehabbing the home and/or moving out quickly. In this scenario, paying only interest cannot hurt the borrower that much.

However, if the borrower uses an interest only mortgage to qualify for a large, pricy home that they cannot afford, then it becomes a bad financial tool. The borrower will not be paying back any of the loan's principal amount and therefore not building up any equity in the home. In a depreciating market, this can be deadly since borrowers may find themselves owing more money than the house is worth. Borrowers should be careful about choosing an interest only mortgage and thoroughly discuss all options with a mortgage broker and a qualified financial advisor.