The term "negative amortization" refers to the potential for your loan amount to increase over time - in other words, you might have reverse or "negative" amortization. These loan programs allow you to pay less that the full amount of the interest due on your mortgage. If you pay less than the full amount of interest due, the difference is added to your principle balance. A typical negative amortization loan has the potential of growing to 125% of its original amount.
It Goes By Many Names
Negative amortization mortgages are sold as "Option ARMS", "Pay Option ARMS", "Pick-a-Pay" programs, and a variety of other names. The characteristic they share in common is a low payment rate, usually between 1% and 1.95%. This rate is not the true note rate; it is the rate that your payment is based on. The true note rate is a market rate, or "fully indexed rate", and may be 5% or more above the payment rate.
A Nationwide Phenomenon
I'm a and also hold mortgage broker licenses in Georgia, Massachusetts, and Virginia. Florida mortgage customers have increasingly turned to these mortgages as real estate values have increased over recent years. This phenomenon, of course, is not limited to Florida. As home values nationwide have increased, borrowers have struggled to find ways to afford homes that once cost half as much.
Look at Your Real Cost
And please don't assume that you are saving money. Without a doubt you are going to enjoy your tiny payment (as long as it lasts), but make sure that you take a good look at the fully indexed rate. This is your real cost. Compare the fully indexed rate with the rate on a good old fashioned 30 year fixed rate mortgage. You might find that the real cost of your super low payment negative amortization loan is quite a bit higher than the fixed rate option that is available.
It's Not a Fixed Rate Mortgage
We often get calls from customers that have been approached by other mortgage brokers offering these products. And it never ceases to amaze me how many of these callers believe that these are fixed rate mortgages. At one percent! Occasionally the caller will be furious at me for dashing their hopes. If you are considering a negative amortization mortgage please make sure that you understand what you are getting. As a we deal with a fair percentage of retired people for whom these loans are simply not appropriate.
The HELOC Problem
If you have a negative amortization mortgage you may not be able to get a second mortgage or a home equity line (HELOC). What's up with this? Second mortgage and HELOC lenders base their loans on the amount of equity that you have in your property. Since your negative amortization mortgage has the potential to increase, the amount of equity that you will have in the future is uncertain. You may find that your best bet for a second mortgage or HELOC is with the same lender that gave you the negative amortization mortgage.
A Lower Payment is Really Nice
There are some attractive characteristics of negative amortization mortgages. Well, one anyway. You get to make a lower payment. A lower payment can mean many things. It can make that house that you want to buy affordable. And it can free up your cash flow for other things. If you have a pile of high rate credit card debt you might make a very solid case that you are better off making the smaller payment on your mortgage and channeling your savings towards paying down your credit cards.
Keep an Eye on Your Monthly Bill
You would be well advised to keep an eye on your monthly bill which will tell you how much negative amortization is accruing. Make sure that you don't drift into a state of denial. When you are ready to sell your home your proceeds will be reduced by the fattened balance of your mortgage. customers, like those in other states have seen property values soften in the last year. Be aware that your equity could be effected by the market as well.
When the Party's Over
Normally your minimum payment will increase a small amount each year for the first five years. At the end of the five years you loan will be recast. This means that your loan will be amortized over the remaining term of the loan ? normally 25 years. Make sure that you are prepared for the potential payment change. It doesn't hurt to ask your mortgage broker to calculate the worse case scenario for you. It's best if you know the potential.
Copyright ? 2007 James W. Kemish. All Content. All Rights Reserved.
You finally found that commercial property you want to buy - fantastic! Now what? All you need is the money and where do you get that? A commercial lender, of course. And here's the million dollar question - where do you find a lender you can trust, get the deal done, and with whom you enjoy dealing? You can go to the Internet and type "Commercial Mortgage Lender" into the search box and that will get you over 1.6 million options to look through. Doesn't seem like a good way to spend your time.
Another option may be your local bank, the one that knows everything about you including your financial history, current holdings, and existing bank account. Negotiating a favorable rate with your local bank is like playing poker while showing everyone else at the table your hand. You lose the edge, the bargaining power to get the best deal. This is not saying that your bank will purposely strike you a bad deal, but unless you are borrowing millions of dollars and are a regular source of volume, they have no truly compelling reason to give you their best rates. Besides they already have your money and unless you are going to borrow $10 Million or so it is probably just not worth their time.
While there are many different ways to go about financing a commercial property there is only one right place to start and that is with an experienced commercial mortgage broker. Someone that has sailed the commercial finance seas many times and knows the locations of all the rocks, waves, shallows, and pirates that will surely sink your ship. Realize that a mistake in commercial mortgage financing can cost you thousands or millions of dollars. These pitfalls include lockout periods, balloon payments, prepayment penalties, and resource loan structure.
A commercial mortgage broker is one of your strongest allies. Their job is to become intimately familiar with your financing needs and find solutions to meet those needs. They utilize their voluminous lender relationships to bring you the best deal possible based on your property type, financial situation, strategy, and timing. A broker has access to wholesale rates that are rarely offered to you, the consumer. Even the "preferred rates" offered by longtime contacts at your bank rarely compare as favorably.
Working with a bank for a commercial mortgage is similar to feeding the fat goldfish in your aquarium. They have come to expect food regularly provided them and will get around to eating when they are ready. On the other hand, working the commercial mortgage market through a broker is like dangling live bait over a shark tank. Lenders will go after the deal like a hungry shark, but you certainly don't want to be the one holding the bait. That's the job of your mortgage broker. The result will be the right deal for your situation and you didn't lose any fingers in the process (or your shirt for that matter). Notice I didn't say lowest rate, I said best deal. Often one's best financing option is not the lowest rate - more on that in another article.
Brokers are matchmakers - intermediaries. They bring together those who have with those who need. It is all about relationships. It is paramount for you to trust your broker. If you find it hard to have a relationship with your broker it is likely that others will have a hard time as well. If a broker can't understand you and your needs, they will not be of service to you or your needs. A broker must maintain relationships with you and with lenders. If they have a hard time establishing a relationship with you then what about their relationships with lenders? As with any business relationship, go in with your eyes open.
Bottom line is this. Give a broker a shot. On your next commercial loan take a little extra time and compare what a commercial broker can do with what the local bank can do. My bet is that you will find that the broker is the best bet and you may be on your way to developing a wonderfully profitable relationship with a mortgage industry professional.
Both Jim Kemish & Patrick Bedall are contributors for EditorialToday. The above articles have been edited for relevancy and timeliness. All write-ups, reviews, tips and guides published by EditorialToday.com and its partners or affiliates are for informational purposes only. They should not be used for any legal or any other type of advice. We do not endorse any author, contributor, writer or article posted by our team.
Jim Kemish has sinced written about articles on various topics from College Student Loan, Credit Loans and Free Credit Report Score. Jim Kemish is the president and founder of Power Mortgage, a based in Delray Beach, Florida. Power Mortgage Corp was established in 1989 and s. Jim Kemish's top article generates over 301000 views. to your Favourites.
Patrick Bedall has sinced written about articles on various topics from Finances, Real Estate and Finances. You are welcome to share this report, unedited and in its entirety. All links must remain intact. No information in this article should be taken as legal advice. The VEC Financial Group (VEC) is dedicated to providing commercial mortgage and business fina. Patrick Bedall's top article generates over 165000 views. to your Favourites.