Mortgage second » Adjustable Rate Mortgages

The Risks of Negative Amortization Home Mortgage Loans

admin — Wed, 17 Mar 2010 23:31:34 +0000

Negative amortization loans, also known as deferred interest loans, neg am and payment option ARMs (adjustable rate mortgages), are home financing options that have payment adjustment caps in addition to interest rate adjustment caps. This means that even though the loan’s interest rate may increase, your payment will generally stay the same. As housing prices skyrocketed, these loans became more popular because they gave homebuyers more power to purchase more house for a lower initial cash outlay. The 1% start rate also makes house payments more affordable for the first few years of the loan.

How Negative Amortization Occurs

A mortgage is largely figured by using the loan amount, the interest rate and the number of years to pay back the loan. Traditional mortgages consist of monthly payments to cover interest and a gradual reduction of the principal (amortization). With negative amortization loans there are payment caps that limit the amount of payment increases, but not interest-rate increases. As a result, the minimum payments do not even cover the monthly interest. The shortfall is automatically added to your loan balance, causing the principal balance to increase rather than decrease.

Neg-Am and Option ARM Risks

If you make the minimum payment, in addition to the unpaid interest being tacked onto the loan balance, additional interest may be charged on the shortfall. So, the deferred interest can take your equity and cause you to owe more than what the house is worth over time.

Comptroller of the Currency John C. Dugan said regulators are especially concerned about negative amortization loans in real estate markets entering down cycles: “If real estate prices decline — and there already is evidence of softening in some markets — these borrowers could face the bleak prospect of loan balances that exceed the value of the underlying properties.” Dugan and other regulators are also worried that many people may not fully comprehend the impending payment shock when the loan adjusts to fully indexed payment.

The federal financial regulatory agencies express concern over the fact that these low payment home buying options are offered to a wider spectrum of buyers who may may not otherwise qualify for a similar-size mortgage under traditional terms and underwriting standards. And, institutions are increasingly combining these loans with other features that may compound risk (“risk layering”) including reduced or no documentation loans, and the 100% 1st mortgage, also known as a no money down home loan or 80-20 loan because of the typical 1st mortgage that covers 80% of the purchase price and simultaneous piggyback 2nd for the 20% balance.

By: Mary Ny

Your Options When You Missed Two Mortgage Payments

admin — Wed, 13 Jan 2010 00:58:54 +0000

Home owners across the country are facing adjustable rate mortgages that having increasing payments that make on time payments next to impossible to make. If you are a home owner that is facing this stress because you missed two or more mortgage payments you need to be aware of how serious of a problem you face and what you can do about it.

Dealing With Multiple Late Payments

The first thought for people with past due mortgage payments is the fear of foreclosure and losing their home. While technically a mortgage lender can start to foreclose after just one late payment many lenders will not start until you are 120 days past due. So even with two missed mortgage payments you should still be in the safe zone, at least for a little while.

When you miss your first mortgage payment you will limit your ability to refinance with a conforming mortgage for a minimum of 24 months. You will also not be eligible for FHA or VA financing for a period of 12 months. The only way you will be able to refinance with multiple late payments is to get a sub prime mortgage, and you will more then likely be limited to borrowing no more then 70% of your homes appraised value.

Once you miss your second mortgage payment your options now almost begin to fade away into nothing. Since the recent sub prime crisis most of sub prime lenders programs for borrowers with multiple late payments have all but disappeared. The best option at this point is to call your mortgage holder and work out a repayment plan with them. If your loan was an adjustable mortgage you should ask them for a loan modification. This is where the lender will either give you a fixed rate mortgage or stop any additional rate increases for a set period of time.

The most extreme option for home owners who are missing mortgage payments is to sell the home and either move into a more affordable home or rent until they can save up a good down payment for a similar home. While no one wants to lose their home sometimes it is the best option, and in many cases it will inevitably happen through foreclosure. At the very least you can save your credit rating by selling the home before a foreclosure happens.

Honesty is going to be your best option when you are in this type of situation. Your mortgage holder will be more the likely to help you if you contact them early and are up front and honest with them about your current situation. But you should also be honest with yourself and never try to save a home you just cannot afford, it will wind up costing you more money, stress and credit points then it is worth.

By: Darin Sewell

Fixed Rate Home Equity Loan Versus Adjustable HELOC: Comparing 2nd Mortgage Loans

admin — Sat, 19 Dec 2009 18:07:23 +0000

Many people think of a second mortgage as a fixed interest, lump sum loan. However, that is only one form of a second mortgage. A second mortgage is actually ANY secondary lien on your home–secured loan with your home pledged as collateral. Second mortgages are typically categorized as fixed mortgage rate home equity installment loans (HELs), also known as home equity loans, and home equity lines of credit (HELOCs) which are adjustable rate mortgages.

The Federal Reserve states that the home equity line of credit annual percentage rate (APR) is a variable rate loan based solely on a publicly available index (such as the prime rate published in the Wall Street Journal or a U.S. Treasury bill rate). The APR does not include points or other finance charges. The monthly payment amount will adjust as your loan balance and interest rate changes. Loan terms can be anywhere from 15 to 30 years.

HELOCs have a draw period, typically occurring in the first 10-15 years, with the remaining term on the loan referred to as the repayment period. During the draw period, you can draw out money on a revolving basis similar to a credit card without applying for a new loan, as long as the amount does not exceed the total amount of the original HELOC. During the repayment period you may be allowed to renew the credit line. If your plan does not allow renewals, you will not be able to borrow additional money once the draw period ends. Interest is paid only on the amount of equity you use.

A Home Equity Installment Loan (HEL) is a fixed mortgage rate loan, which means the annual percentage rate (APR) and monthly payment will stay the same for the life of your loan. The APR for a HEL takes into account the interest rate charged plus points and other finance charges. Loan terms can be anywhere from 5 to 30 years, but are typically 15 to 20 years. Unlike a HELOC, you get a lump sum for which you immediately start paying principal and interest. If you decide later that you need additional funds, mortgage refinancing or getting an additional loan with additional closing costs are your only options.

Which type of loan you choose depends on your financial needs. A HELOC may be best if you have a recurring need for money (e.g., home improvements or a home repair project that has anticipated additional expenses). The security of a fixed-rate 2nd mortgage will probably provide much-needed relief for a large one-time expense (e.g., debt consolidation).

By: Maria Ny