October 3rd, 2007 2:17 PM by BILL WILBANKS
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 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