1.25 Neg Am Loans How Deferred Interest Mortgages is Good Home Financing
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1.25% Neg Am Loans: The Benefits of Deferred Interest Mortgages
Summary
Can a 1.25% interest rate really happen? Negative amortization loans, or "deferred interest" loans, offer unique payment adjustment caps alongside interest rate caps. These loans use two types of interest rates: the payment rate and the actual interest rate. The payment rate is usually capped at 7.5% of the previous payment, while the actual interest rate is the index plus the margin, without periodic caps.
Understanding Negative Amortization Loans
Negative amortization mortgages involve calculating multiple interest rates. The "payment rate" is capped at 7.5% of the previous payment, while the "true interest rate" is the index plus the margin. If the interest rate rises with a negative amortization Adjustable Rate Mortgage (ARM), the payment remains unchanged, and any extra interest is added to the loan balance.
Homeowners can choose which rate to pay, making these loans also known as "payment option" loans. Options like the Cost of Funds Index (COFI) and the Monthly Treasury Average (MTA) are examples of Alt-A negative amortization loans. The Mortgage Bankers Association of America reports that Alt-A loans increased from 8% to 11% due to their flexibility and affordability, whether for home purchases or refinancing to cash out home equity.
Interest-Only Loans as an Alternative
Interest-only loans are another affordable option, allowing borrowers to pay just the interest for a fixed period, typically five to seven years. After this term, you need to refinance, pay the balance in full, or start paying down the principal, which raises monthly payments. Like negative amortization loans, interest-only loans are classified as option ARMs, providing the flexibility to pay interest only or both principal and interest.
Who Can Benefit?
Negative amortization and interest-only loans are ideal for those focused on cash flow rather than building equity. They can lead to lower monthly payments compared to traditional 30-year loans. These loans are suitable for short-term borrowers planning to refinance or sell within a few years, or those with fluctuating or insufficient income to qualify for conventional loans.
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