My favorite client "Kenton", a young college grad and shopping for a first-time buyer home, and I were discussing types of mortage loans.

I advised him to steer clear of the "Pick a Payment" types of mortage loans.  What's a Pick-a- Payment???  That's one of those real estate "insider" industry terms.

Well, I explained, Countrywide and other mortgage lenders offer some loans in which the borrower can select their payment every month, and choose between:

• Full payment of principal + interest, which is fully amortized and will be paid off in 30 years.
• Full payment of principal + interest + extra principal, to pay off in less than 30 years.
• Payment of interest only, which does NOT pay down the principal balance at all.
• Partial interest payment, which accrues Negative Amortization.

Those last payments are called "Neg Am" loans, I explained.  Another industry term, I realized!

Excuse me, but what's a NEG AM loan?

That's when you, the borrower are ADDING to the principal balance of your mortgage loan, rather than paying it down.

For example, I explained, the interest rate on your loan is 5%.  But the lender allows you to pay only a 1% rate (often called a "teaser rate").  Although it seems great because your payment is low, the 4% interest that you are NOT paying is still being charged to your loan -- it's silently increasing your loan balance every month.

Isn't that bad?  Kenton asked.

YES that's why I advise my clients NOT to get NEG AM loans with low "teaser" interest rates, I explained.

Why in the world would anyone get a neg am loan, he asked, puzzled...

MANY homeowners in California borrowed loans like these a few years ago.  They were only meant as short-term loans.  Quick fixes.  When they thought the real estate market would keep going up and up... and they didn't think about the future.  Or the long-term effects of their loan. 

And neither did the mortgage lenders!

So hundreds of thousands of these loans are now (or will soon be) in default... which means more foreclosures flooding the market... and the economy will continue its downward spiral...

Buying a house?  Questions about what type of loan is best for you and your family?  Call a trusted, reliable mortgage broker in your local area.

And remember to plan for the LONG TERM.

Regina P. Brown
Broker, Realtor®, e-Pro
Author of eBook "Stop Foreclosure Fast: Solutions to Save your House"
Author of forthcoming book, "Virtual Office Guide for Business Professionals:  Work & Profit from Home"
Join & post to my NEW ActiveRain group at http://activerain.com/groups/virtualoffice

Text copyright © 2009 R.P. Brown, All Rights Reserved