Danger Of Deferred Interest Mortgages Understanding The Risks Of Negative Amortization Home Loans



Danger of​ Deferred Interest Mortgages: Understanding the​ Risks of​ Negative Amortization Home Loans
Negative amortization or​ neg am occurs when the​ minimum payment on​ a​ mortgage covers less than the​ monthly interest charged,​ causing the​ balance of​ the​ loan to​ increase instead of​ decrease .​
Interest only loans generally don’t increase the​ balance due on​ a​ home although they don’t diminish the​ amount due .​
However,​ deferred interest loans will increase your loan amount .​
This can happen with negative amortizations loans like a​ payment option ARM,​ where payment choices can be calculated based on​ COFI - the​ 11th District Cost of​ Funds Index which demonstrates the​ average interest rate paid by certain banks in​ Arizona,​ California and Nevada or​ on​ MTA - the​ 12 month Treasury Average,​ giving you​ a​ variety of​ choices in​ payments .​
While these loans can be a​ good deal when short-term interest rates are low,​ they are not necessarily the​ right choice when short term loans have a​ higher interest rate,​ like now .​
For most,​ now is​ not the​ right time to​ refinance a​ fixed-rate loan for a​ deferred interest mortgage.
If you​ are looking to​ eventually cash out home equity,​ you​ should look for a​ purchase loan that involves paying some of​ the​ principal .​
Not only is​ it​ possible you​ may not build equity in​ your home with neg am loans,​ but you​ also may have a​ loss of​ equity through an​ increased mortgage balance .​
If you​ suddenly need to​ sell your home,​ you​ may not be able to​ get a​ purchase price high enough to​ cover your loan .​
You will also have more difficulty getting a​ second mortgage behind negative ARM loans.
Henry Savage,​ president of​ PMC Mortgage notes that on​ a​ deferred mortgage,​ the​ mortgage balance can increase as​ much as​ $350 per month for every $100,​000 that's borrowed .​
The neg am on​ a​ $500,​000 loan for example,​ can be as​ much as​ $1,​750 per month .​
He continues by noting,​ There are not many circumstances where I​ would recommend an​ Option ARM .​
However,​ there are a​ few instances where deferred interest or​ negative amortization loans may make sense .​
Neg am loans are good for investment properties when you​ may be paying a​ double mortgage .​
They are also good for self-employed with cash flow issues .​
If you​ plan on​ normally paying some of​ the​ principal,​ but don’t know what your cash flow will be like from month to​ month,​ it​ may be helpful to​ have the​ option of​ a​ minimum payment .​
Do you​ homework before deciding on​ a​ deferred interest mortgage .​
Although your payments will be lower,​ there are inherent risks involved and you​ may be better off with a​ fixed-rate mortgage.





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