How to Understand Negative Amortization Loan mortgages

Posted by Anonymous , 9/4/2007 Tags:UnderstandNegativeAmortizationLoanmortgages
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How to Understand Negative Amortization Loan mortgages

Introduction

Understand this dangerous loan that has stripped billions in equity from homeowners!

Instructions

Difficulty: Moderate

Things You'll Need

  • Common Sense
  • Prudence

Steps

1

Step One

Click to enlarge

What All Homeowners Should Know!

How It Began.
The refi boom began to end in 2004. Banks and lenders needed to keep the sales going, so they began pushing an old loan product much more aggressively. The Pay-Option ARM loan was sold to consumers all over the United States. People flocked like sheep to the low payment feature of the loan due to the low 1% start rate. People all over the nation got into trouble, or lost thousands of dollars attempting to get out from a loan that few understood, and sales Agents werena??t explaining very well. The NEGATIVE AMORTIZATION feature allows for lower payments, but there are some suprises. The portion of your payment that you do not make each month is added to your mortgage balance increasing your debt. Few were explained the details of this product and millions of Americans have been hurt by it.
2

Step Two

Adjustable Rate mortgages at-a-glance
Pros a?? Typically lower initial interest rates (except in current market 2007). If interest rates remain steady or decrease, could be less expensive over time.
Cons - Lower rate means you potentially assume more risk. If interest rates increase, you'll be faced with higher monthly payments in the future, and rate adjusts with the market.

The Basic Features
The Adjustment Period: With most Adjustable Rate Mortgages (ARMs), the adjustment period occurs every one, three, or five years, resulting in a change in your interest rate and monthly payment. So the low rate can be fixed for a period of time prior to adjusting. I personally have always used ARM loans typically 3/1, 5/1 or currently a 7/1 ARM fixed for seven years.

THE NEGATIVE AMORTIZATION LOAN has a super low teaser rate of 1 or 2% and will adjust within 6 months or one year. So beware of any rate well below what you can find on Bankrate.com for a fixed rate mortgage.
3

Step Three

TIP:
Before deciding on an Adjustable Rate Mortgage, ask yourself these 4 questions:
1. Is my income going to increase enough to cover higher mortgage payments if interest rates go up especially if the adjustment period is approaching soon?
2. Will I be taking on other sizable debts, such as a loan for an auto or tuition in the near future?
3. How long do I plan to own this home? If you plan to sell soon, rising interest rates may not pose the problem they can if you plan to own the house for a long time.
4. Whata??s the Fed doing? Has the Fed been raising rates? Are we in a raising or lowering rate economy? MSNBC or CNBC will tell you that on any given day.

Overall Tips & Warnings

  • VITAL RULE: Always, always, always watch out for pre-payment penalties.
  • Consumers are tricked everyday into thinking the loan they just closed has no pre-payment penalty.
  • The truth is displayed in the loan documents, but ita??s both hard to locate and hard to read. So you have to know where to look. There will always be a page to initial and sign that says Prepayment Penalty Yes or No.
  • You can ask the notary, but they may be on the side of the lender, and act as if they do not know.
  • To protect yourself up front, be sure that the loan agent has put in writing to you that the loan has NO PREPAYMENT PENALTY. They will not do it way up front, so you will know, or they risk going to jail if they mislead you in writing.
  • Beware of brokers
  • Brokers only purpose is to take a rate from a lender or banking institution and mark it up, and sell you a higher rate, making them a pure middleman.
  • Brokers cause most of the fraud in the industry and typically charge higher commissions and fess to the consumer.
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