I see ads with people dancing on rooftops because their mortgage payments are so low. What's really going on here?
The ad says they found a $510,000 mortgage for under $1,698 monthly. With a financial calculator and know variables of $510k (loan amt), $1,698 (payment) & 30 year (amortization period), we can compute the interest rate at approx 1.25%. Many websites, including my own provide mortgage calculators.
Is it really possible to receive a payment this low? The answer may surprise you. It's found in payment option programs. Lenders brand their program with names like Pick a Pay, Payment Option ARM, Smart Choice etc. Borrowers receive monthly statements with four (4) payment options.
(1) 15 & (2) 30yr Principle & Interest mortgage payments. You can accelerate payoff with the 15 year option or choose a traditional 30 year time period for lower monthly payments.
(3) Interest Only you pay only interest without principle. As your home is likely to increase in value, equity can grow while principle remains the same. Interest only is available in other less complex loan products.
(4) Deferred Interest is similar to making minimum payments with credit cards except that equity reductions may be offset with property appreciation. The unpaid portion remains on your account. In our example, the difference between 1.25% and the fully indexed rate is added to your loan balance. If the index rate is 7%, and you "pick to pay" the 1.25% option, the difference (5.75%) is added. Using the $510k loan example, +$1,695.00 would be added monthly in deferred interest. These programs are not available @ 100% Loan To Value and require lower LTV's for Non-Owner Occupied properties.
There are also hybrids which offer an introductory period with below market fully amortized interest rates for several months before borrowers receive monthly statements with their 4 payment options. These programs generally have higher fully amortized rates than those without so ask how long it lasts before jumping for this option.
These programs might be an attractive alternative for those looking to manage cash flow payments seasonally or a limited period of time. Seasonal (investment) rental properties or high commission earners are some examples. Many programs cap the loan amount at 115% of the original amount. choosing the deferred interest payment option exclusively may cause the loan to recast prematurely and limit future payments to principle & interest options.
There are many creative uses for deferred interest options including property rehab & bridge loan alternatives, provided there are no prepay penalties. A property cannot be listed for sale when you refinance.
Call Greg Zaccagni @ 630-818-6856 for your Mortgage Solutions
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www.MortgageAdvisor.info
Related Articles:
Illinois Attorney General Sues Countrywide for alleged deceptive loan practices
Pick A Pay / Payment Option Loans go on the endangered species list
Lenders waive existing prepay penalties on Payment Option Loan Programs
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Greg,
I have seen the ads and I have had people ask me about that. It is an interesting option and it seems that it is a good option for people with a variable income (like real estate agents perhaps?),but I am sure it does not work for everybody. Thanks for the explanation, of course if someone wanted to get a mortgage like this one they would need more information.