1.25% Neg Am Loans: How Deferred Interest Mortgages is Good Home Financing
Posted by Nick Niesen on October 29th, 2010
Do 1.25% interest rates really exist? Neg am mortgages calculate several mortgagerates. One is called the payment rate the other is the actual interest rate. Fortunately, the payment rate is capped at 7.5% of the previous payment. The true interest rate is calculated as simply the index plus the margin without periodic caps. When the interest rate resets to a higher rate with a negative amortization Adjustable Rate Mortgage (ARM), the mortgage payment doesn't change. Instead, the additional interest expense is added to the loan balance.
Homeowners are given a choice of which rate to pay, which is why negative amortization loans are also referred to as "payment option" loans and option ARMs. Cost of Funds Index (COFI), Cost of Savings Index (COSI), and Monthly Treasury Average (MTA or MAT) are all examples of Alt-A negative amortization loans. The Mortgage Bankers Association of America (MBA) says alt-A loans' share rose from 8% to 11%. Why? Because of the flexibility these loans offer, not to mention affordability for a home purchase loan or if you want to cash out on your home equity with a mortgage refinance.
Negative amortization and interest-only loans can be useful if you are primarily concerned with cash flow instead of building equity. If you only pay the payment rate, the overall monthly mortgage payment might be lower than a typical 30-year, amortization loan. If you're a short-term borrower who plans to refinance or sell the home within a period of a few years or if you have unsteady sources of income or too little documented income to qualify for a traditional loan, you may want to consider a neg am loan or an interest only home loan.
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About the AuthorNick Niesen
Joined: April 29th, 2015
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