What Good Is A Neg Am Loan?

What Good Is A Neg Am Loan? by Bill Roberts

There is a lot of talk lately about people getting stuck with PAY OPTION ARMs that are really negative amortization loans. The general consensus seems to be that the mortgage industry really took advantage of people with these types of loans. It is said that they allowed people to buy "more house" than they could afford.

WEALTH BUILDER LOAN

Well that is one of the purposes for a properly constructed WEALTH BUILDER LOAN, as a pay option arm is called. The idea is that houses may be unaffordable right now, but if you could buy at today's price, maybe you could afford it in five years or so after you have gotten a better job or just make more money due to anticipated pay raises and cost-of-living increases. As long as you can make the minimum payment you'll be OK.

One of the main problems with this type of loan is that when the borrower makes a payment for less than the interest that is owed, the unpaid amount of interest is added to the balance of the loan. This is known as negative amortization.

RECAST

And when the new loan balance grows to a certain ratio of the original loan, the loan will RECAST. This simply means that the loan will cease being a pay option and will become a FULLY AMORTIZED loan.
In simple English, the payment will increase. We are not talking about an increase due to an adjustment in the rate, but rather an increase due solely to having to make the full payment.

The problem with these loans is that some recast before you are ready to make the full payment. The ratio at which your loan will recast is spelled out in the loan documents. Some recast at 110%, some at 115%, and some will not recast until the loan balance reaches 125% of the original loan balance. The lower ratios could recast in as little as three years. But the 125% ratio might not recast for a full ten years.

In the very simplest terms, houses have "historically" doubled in value every ten years.

Here is a hypothetical example:

Let us suppose that the borrower(s) just barely qualified for this loan with $100,000 in gross annual income, but by the time the loan is ready to recast their combined income has grown to $250,000 per year. Now don't you think they can "afford" that house? Look at the equity they have been able to amass because of this loan product. They haven't paid anything on the principal for ten years but they have a 56.25% LTV (loan to value). WOW! That is why it is called a WEALTH BUILDER loan.

If you would like to get a Wealth Builder loan or utilize other mortgage planning techniques to increase your financial position, call Bill Roberts (619) 244-4610.