There is no doubt that we are in a buyer’s market. We have seen home prices drop about 10-15% over the last year and a half. The reason for much of this downtrend throughout the US is a significant oversupply of homes for sale currently on the market. And the reason for all these home offerings in many cases is directly due to the loan program the sellers either chose at purchase or via refinance.

The reason why home owners often made poor loan selections is broad. In many cases they believed the market would continue to go up or they wanted to get the lowest possible payment. Perhaps they didn’t do their own research and shop around for their loan program and thus were put into a loan program that was bad for them but very good for the bank. But most likely the just didn’t think the loan program all the way through to see where it could situated them. It is funny but people will shop homes to death and compare them up against each other in every way manageable but they often completely ignore or don’t understand their own loan choices.

For this article I am going to discuss the choice of a pick-a-payment ARM or negative amortization loan program which is pretty much the worst loan choice for the majority of homeowners. What is a pick-a-payment loan and how can you be aware of it? These loans offer the borrower multiple payment options on a monthly basis. One option is the full traditional payment of principle and interest. Or the borrower can choose an interest only payment where there is no principle paid. But the worst option by far is the ultra-low payment where the borrower pays significantly less but the remaining amount due of the traditional payment is put directly back on the principle of the loan. This can be a terrible financial trap to fall into.

The worst aspect of these loans is really two fold. First borrowers often get in a financial situation where the lowest payment option becomes the one they start using periodically or exclusively. Secondly, they chew right through their equity and quickly become unable to refinance into a better situation. Once the equity is used up the banks will not refinance the loans since the borrowers actually owe more than the home is worth. No bank will touch that and for good reason.

Right about at this point the loan interest rate spikes up since it is on an ARM program and is adjustable with a payoff due in 3 to 5 years. There are people currently paying interest rates of 8.5% or more on the first loan when they could have a fixed 30 loan in the low 5-6% vicinity. Trying to take the least expensive monthly path in Real Estate is the quickest way to the most expensive and potentially investment destructive vehicle possible.

It’s not hard to imagine now why people are losing their Murrieta and Temecula homes, prices are dropping and the mortgage industry is in trouble. To sum up - the borrower has not paid any debt down but added significantly to the principle. Their monthly payment is higher because of the increasing interest rates. And they can’t refinance because they owe too much and/or there is usually a significant loan pre-payment fee associated with these and other easier option loans. The home owner has literally no way out and thus often has to go into default thereby causing the current situation.

One major thing to keep in mind is that lenders pay extra to loan officers and loan brokers for such programs because they are highly profitable to the bank. Sometimes credit dictates a loan pre-payment penalty. But often these are put in solely for increased loan commission. It is incredibly important to understand your loan program and to choose a responsible path for your family. There are some fantastic loan programs at historic lows available to any with decent to good credit.