Does Danger Lie Ahead?
Beware of Adjustable Rate Loans (An ARM) with a negative amortization option
If you are making minimum monthly payments, you may soon reach your loan limit!
If you or your client received a notice called "Significant Payment Increase Alert" from the bank that you have a loan with BEWARE! This notice is usually sent out six months prior to you capping out and reaching the MAXIMUM LIMIT that was originally established. Once you exceed your maximum limit (Typically from 110-115% of the initial loan balance), you loan will AUTOMATICALLY convert (RECAST) to a fixed rate loan at the present market interest rate. *This rate will be the current interest rate plus the margin your lender negotiated with you (typically 2-3%).
How might this affect you? Take a look at the example below.
Let's say you have an ARM amount on a property of $200,000 with the option to make monthly minimum payments (LESS THAN INTEREST ONLY). Instead of paying $1500 per month which would cover the interest and principle payments, you may have paid the MINIMUM payment of $700 per month. Since you acquired the loan in 2005, in two years you have increased the loan amount to nearly $219,200! (Since the bank adds any unpaid interest and principle to the original loan amount).
A loan is recast after you have reached the maximum loan limit. Your payment will convert to a fixed, principal and interest loan. New monthly payment at this point may SOAR to more than double! You will have no option but to make these full payments!
You absolutely want to avoid this situation! Here's why;
1.) Current property appraisal values MAY NOT support this increased loan value Therefore you MAY NOT qualify to re-finance into a new loan!
2.) Your monthly mortgage payment may be significantly higher than you can afford!
Here are two plan of action to avoid a recast of your loan. BUT YOU MUST ACT QUICKLY!
1.) Increase your monthly payments to at least an INTEREST only amount. This stops your loan balance from rising to the maximum loan amount! It may be challenging, but most people can find a way to eliminate hundreds of dollars elsewhere in their budget to make this happen!
2.) Consider options to refinance at a lower interest rate than the recast rate. The difference between a recast rate and regular rate may be 2.5% or BETTER! The sooner you take action, the more options are available to you!
3.) Did you wait too long? Is your recast rate coming up soon? Then call me, right away! There may be time left to make necessary changes if you act fast!
Some people believe the easiest way to solve the problem is to walk away from the property and FORECLOSE! However, there are several strong arguments against doing this! When you default on a mortgage loan, it ruins your CREDIT for many years! You will not be able to purchase another property unless you have a LARGE cash down payment and/or are willing to pay an extremely high interest rate.
Consider this! Your credit score affects your life in many other ways. You may find it difficult to obtain loans for cars, furniture, etc. Even landlords AND employers require a credit check prior to renting or employment. Financial stability suggests a more responsible individual.
Hang in there people! Welcome to my World! Diana
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