Danger of Deferred Interest Mortgages Understanding the Risks of Negative Amortization Home Loans
Below is a MRR and PLR article in category Finance -> subcategory Mortgage.
Understanding the Risks of Deferred Interest Mortgages: Negative Amortization Home Loans
Summary
Negative amortization, or "neg am," occurs when mortgage payments don't cover the monthly interest, causing the loan balance to increase. This situation can arise with certain loans like payment option ARMs, where payment choices are tied to indices such as COFI (11th District Cost of Funds Index) or MTA (12-month Treasury Average). While these loans might seem attractive when interest rates are low, they may not be suitable when rates are high.
Exploring the Risks
Negative amortization loans can significantly impact your financial situation. While interest-only loans keep the balance constant, deferred interest loans actually increase it. This happens with loans like payment option ARMs, where payments can be based on indices like COFI or MTA, offering a range of payment options. However, these loans might not be wise choices if current short-term rates are high.
If your goal is to build home equity, consider loans that include principal payments. Negative amortization loans not only prevent equity growth but can also lead to a loss of equity due to an increased mortgage balance. Selling your home could become challenging, as you might not achieve a sale price high enough to cover your loan. Additionally, securing a second mortgage alongside a negative ARM can be difficult.
Henry Savage, president of PMC Mortgage, highlights that on a deferred mortgage, the balance can increase by around $350 per month for every $100,000 borrowed. For a $500,000 loan, this could mean an increase of $1,750 monthly. Savage suggests there are few situations where an Option ARM is advisable, although there are exceptions.
Potential Benefits
While risky, negative amortization loans can be beneficial in specific circumstances. They may suit investment properties where you might be dealing with dual mortgages or for self-employed individuals facing fluctuating cash flows. If you generally pay some principal but are uncertain about your monthly cash flow, having the option of a minimum payment could be advantageous.
Conclusion
When considering a deferred interest mortgage, it's crucial to weigh the pros and cons. While lower payments might seem appealing, these loans carry inherent risks. Conduct thorough research and consider whether a fixed-rate mortgage might be a safer bet for your financial future.
You can find the original non-AI version of this article here: Danger of Deferred Interest Mortgages Understanding the Risks of Negative Amortization Home Loans.
You can browse and read all the articles for free. If you want to use them and get PLR and MRR rights, you need to buy the pack. Learn more about this pack of over 100 000 MRR and PLR articles.