Orlando Mortgage Blog

Have you seen the ads with the exceptionally low rates (1% to 4%) and payments lower than sea level? I've commented in my blog previously about the "Option ARM or Pick A Payment" type mortgage product which is usually what is being quoted on these ads out there. But, I had a couple additional thoughts to throw in the mix.

Since these programs have potential negative amortization due to the borrower's ability to make a payment that is below the interest due level in a given month during the first 5 to 10 years (the only reason anyone would take them) that negative amortization adds on to their balance due. In fact depending on the program someone selects, their balance can increase up to 115% to 125% of the original amount borrowed over 5 to 10 years. And, that doesn't even factor in what is happening with property values on the whole.

That negative amortization can definitely be a problem if:

• You need to sell and your home has not increased in value to cover the negative amortized mortgage balance and costs to sell. You could be in a position of having to bring money to closing just to sell it.
• If you want to place a second mortgage on the property later on, most conventional second mortgage lenders do not want to place their mortgage behind a negative amortization first mortgage. If the neg-am first mortgage balance goes up it can reduce, if not wipe out, the secured equity position of the second mortgage lender. Home equity lines of credit and loans can be very useful tools for the homeowner. Be careful not to limit your future capabilities due to neg-am firsts.

You must qualify today based on the fully indexed rate on the first mortgage, which is usually a higher rate than a normal fixed rate loan, so unlike before the market guidelines changed in July/August 2007, there is no advantage in qualifying on an Option ARM type product. Sure the payment can be lower, but you'll pay the piper sooner or later. But, I still have wholesale sales people trying to sell me on offering these as great loans for the customer. I TELL THEM ALL "iT'S BULL!" But, they know it. Now you do.

I'd be happy to discuss these loans and make comparisons any time with you. I hope it helps. 

Bill Wilbanks /  www.OrlandoMortgageMasters.com