Adjustable Mortgages! Watch OUT!!
January 7th, 2007 . by Mike KellyOn today’s Show (January 7, 2007), Alicia Hodenfield talked about adjustables and those big,time scary discount “Starter” rates. Here are her thoughtsMy Question to Alicia was regarding a radio spot I heard where the mortgage person talked about rates “as low as .25%, YES 1/4% or One fourth of One Percent!! Here’s her reply:
“SOME NEGATIVE AMORTIZATION? I’d have to say a considerable amount. The .25% loan is really an “Option ARM/NegAM” loan with a lower start rate – which they fix for a 5 year period instead of increasing it annually. It also has a higher threshold of when it will re-cast. The .25% is NOT the interest rate the borrower pays, of course (the rate is generally tied to the MTA or LIBOR – currently at 4.933 – MTA; 5.289 – LIBOR – plus a margin – generally upwards of 2.5%), it is only used for payment factoring and the borrower is deferring the interest they owe. On a $200,000 loan amount, the 30 year amortized payment at .25% would be $576.71. The interest that would have accrued, based on a margin of 2.5% over the index of 4.933 (fully indexed rate of 7.433%) would be$1,238.83 – for a difference of $662.12. That amount is added back onto the loan amount, increasing the principal balance. (Is this the type of numbers you are looking for?)
The .25% loan product, their interest rate could also be fixed for a period – could be 5, 7 or 10 years AND the ¼ % payment can be interest only! On a $200K loan amount the payment is a very seductive $41.67! Think of all that interest not be paid and being added to the principal amount!! Current rates for a fixed back end would be in the 7.5% range at no points. After the fixed period, it would roll to the 6 month LIBOR plus a margin of 2.75% (or currently 8.099%)….
These loans can be a great tool for the borrower that fully understands what they are getting into and is a saavy investor who will use the savings to fund investments as well as purchase assets. They may also be a good alternative to the Reverse Mortgage, depending on the borrower, age, equity, etc. These loans, however, seem to attract the borrower that can’t really afford the loan in the first place, and may not fully understand the concept of negative amortization.
Alicia Hodenfield
Alicia Hodenfield–Investors Trust MortgageDirect line
(707) 284-2718 Cell (707) 483-6299 Fax (707) 573-8109
1105 N. Dutton Avenue Suite 200 Santa Rosa, CA 95401
Licensed by California DRE #01104067/Salesperson License #01501465
