| Payment option mortgages are all the rage in Southern | | | | increase a 100%. The bottom line is that people, who |
| California. With ridiculous purchase prices for homes up | | | | can't afford their payment in the future, will be forced |
| and down the coast, borrowers need a loan that can | | | | to sell their home. In some cases people will loose their |
| help them qualify for their high priced dream home. | | | | home in a foreclosure. If the rate of foreclosure begins |
| Along comes the "payment option ARM", a loan that | | | | to increase rapidly, then mortgage rates could be |
| gives the consumer several choices each month for | | | | affected adversely. |
| paying their mortgage back. This popular loan allows | | | | One major concern of the option arm mortgage is the |
| homeowners to make a payment for less than the | | | | restrictions for future subordinate financing. Frequently |
| interest accrued, and the loss of interest is added to | | | | when people buy a home they don't anticipate that |
| the principal of the loan later. Lenders will actually add | | | | they will need a second mortgage or home equity loan. |
| clauses to the mortgage note that contain parameters | | | | The irony is that many of these borrowers are starting |
| for the loan balance having the ability to grow up to | | | | off with an adjustable rate second mortgage or line of |
| 125%. These loans offer an initial period of reduced | | | | credit. If you purchase a home with an 80-10 or 80-20 |
| payments with deferred-interest. The payment option | | | | loan, the chances of you wanting to refinance the |
| mortgage shifts the paying back choices into the | | | | adjustable rate second loan are very good. Usually the |
| borrowers hands. People have the ability to be | | | | interest rates on the second loan are significantly |
| responsible and make a responsible payment each | | | | higher, and as the value of your home increases, you |
| month, so their loan is paid in full in 30 years, or they | | | | may want to refinance the loan into a lower fixed |
| can risk their homes equity and make the minimum | | | | interest loan. When people get into a negative |
| payment. | | | | amortization first mortgage, they are very limited on |
| Fully Indexed Payment (principal and interest) | | | | financing a home equity loan. Most lenders will calculate |
| Interest Only Payment | | | | the combined loan to value at the maximum potential |
| Minimum Payment (negative amortization) | | | | of 125%. So you take your existing mortgage balance |
| According to Bryan Wilson a mortgage broker in | | | | and multiply it by 125%, and then divide by your homes' |
| Orange County, "these loans offer increased purchase | | | | appraised value. If you are above 100% most lenders |
| power for people because the introductory payments | | | | won't extend you any home equity loan options. |
| can sometimes allow borrowers to qualify for a home | | | | We offer second mortgages behind negative |
| that would cost them $300,000 more with a traditional | | | | amortization first loans, but the rates are higher, and |
| mortgage." He continued, "Consider this...someone could | | | | the credit requirements are more demanding. If you |
| get a million dollar loan for less than $3,500 a month. | | | | plan on financing home improvements, buying furniture |
| With a traditional 30 year fixed mortgage at 6.5% a | | | | or consolidating debt, then I would not recommend the |
| million dollar loan would cost you over $6,300 a month." | | | | payment option mortgage. |
| That is a shocking payment difference that many | | | | Interest only mortgage loans make up over 25% of |
| southern Californian residents could not pass up. Critics | | | | the mortgage market, which only accounted for 10% |
| have always voiced concerns about the implications | | | | of the market share a few years ago. The popular |
| that negative amortization loans could have. Mortgage | | | | payment option mortgages make up over 10% of the |
| bankers have countered with the argument that if your | | | | mortgage market, whereas 2 years ago it held less |
| home increases 25-30% a year, then the downside of | | | | than 1% of the market share. The increased popularity |
| 5-10% negative amortization is minimal. With home | | | | has regulators reconsidering the disclosure process for |
| property values soaring in the last five years, | | | | adjustable rate mortgages. Whether you borrow |
| homebuyers in southern California have been earning | | | | money with a home equity line of credit or refinance |
| equity in their home at a phenomenal pace. With that | | | | with a variable rate mortgage, you need to realistic |
| being said, you can understand why so many people | | | | about budgeting your mortgage payment 6 months |
| are attracted to the payment option mortgage. | | | | from now, as well as five years from now. Consider |
| Recently some of the country's leading bank | | | | paying additional money towards the principal every |
| regulators have issued concerns about home | | | | other month. Ask your loan officer what the fully |
| mortgage loan that have "artificially low starting | | | | amortized payment would be for a shortened period, |
| payments." John C. Dugan, the Comptroller of the | | | | like 20 years. Every other month you should make that |
| Currency, spoke to a group of in Los Angeles last | | | | payment and you will come out ahead quicker. The |
| week regarding the risks of introductory rate loans. | | | | additional money that you contribute to the principal will |
| People need to realize that their initial low payments will | | | | increase the equity in your home, and reduce the |
| increase significantly in time. Dugan continued, "After | | | | years you have to pay back the loan. If you have |
| the limited initial period ends, the monthly payment for | | | | anticipate that you will not be able to pay additional |
| the holder of non-traditional mortgages must increase | | | | money towards the principal, then you should consider |
| & even if interest rates stay flat & the size | | | | borrowing less because if the housing market dips at |
| of that increase can be very substantial." He noted | | | | all you could find yourself in some trouble. |
| that in some cases mortgage payments could | | | | |