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An option ARM, gives borrowers a choice of monthly payments. This can be a great option for borrower with flexible income. However, many option ARM borrowers consistently opt for the minimum monthly payment. The minimum payments are so low that they don't cover the full interest due. The unpaid amount is added to the principal of the loan. Instead of shrinking, the mortgage gets bigger every month, which is known as negative amortization. Whether you are purchasing a new home or refinancing an existing mortgage, negative amortization home loans can benefit many people needing loans for different reasons.
A neg am loan may be worth considering, but as an educated consumer, you should understand that there are both pros and cons of negative amortization. You should completely understand the terms of your loan and know how much interest you are deferring when you make the neg am payments. "Truth is, an option ARM is appropriate for a very small part of the population," says Steve Habetz, president of Threshold Mortgage in Westport, Conn. "Think of a doctor just out of medical school, maybe with kids, and who wants a home in a desired school district and so is maybe going after more housing details. Negative amortization is worth it in this case because ultimately, that doctor's income will pick up and he's cut out transaction costs of moving up in house soon after that income kicks in."
Neg am can hold you hostage though. Besides losing equity, it is difficult to get a second mortgage behind a neg am loan. Very few home equity lenders will go behind a negative amortization 1st. Lending underwriters calculate the 1st mortgage balance by gross up balance 115% or 125% depending on the mortgage note. Even if you can find a lender, you are unlikely to get a 100% equity loan behind a negative amortization 1st mortgage. If you choose a neg-am loan, depending on your credit score, you may have to refinance your negative amortization 1st and then get a new home equity loan. You should consider whether you may need a second mortgage before you get a payment option mortgage.
If you are not planning on getting a home equity line of credit or a cash out second mortgage, a neg-am loan may be a good choice if you if you need the flexibility and varied income. Just make sure you understand the terms of the loan so that you come out ahead in the end.
- Fair and Good Credit Scores OK
- Negative Amortization Loans on Hold
- Debt consolidation with Payment Option Mortgages
- Neg-Am Cash Out Refinance Loans
- State Income Loans Available on hold
- Interest-only Conventional or Jumbo Loans
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- Fully Index Fixed Rate Payments
- Low Rate Adjustable Payments
- Learn more about the "low" Start Rate on Deferred Interest Option
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