I have seen a lot of controversy over "MMA type" mortgage accelerator programs here on Active Rain lately
Some People here on active rain are lumping together MMA's with Option arm Neg Am programs (Deferred Interest) as one in the same and that they are TERRIBLE products for ALL people...
First MMA's and Neg Am option arms are both No where even in the same universe as being the same. When an MMA is set up right there is NO WAY to go "Neg Am" in fact it does not even work closely on the same principle as an Option Arm so I am not sure why they are lumped together here on this blog post....
The only reason I can think that People have chosen to Lump together "Neg AM" option ARMs with "MMA type" programs is because they do not understand either of them....
The "Neg Am" option arms and MMA type, mortgage accelerator loans are NOT the same....The Option Arm has received a bad rap because it is sometime marketed in unethical manners to potential borrowers as a "hook" who really would not understand the loan to begin with, being explained by "rookie" loan officers that don't understand the loan either.
We have all seen the adds: "Get a 1% interest rate on your mortgage" , "Get a $600,000 mortgage for only $500.00 a month..." For crying out loud, even Lending Tree posts ads like these all over the Internet so people will apply through Lending Tree. It is Deceptive and this is where people can get in trouble if they do not take the time to understand what they are getting into...
I do agree that Option Arms are promoted in unethical ways for the sole purpose to ""hook" unsuspecting potential borrowers in getting into this type of Loan when they should definitely NOT be in this type of Loan...I am sure that eventually the FTC and HUD will start to crack down on the "unethical" promotion of Neg Am option arms...
Despite this I believe Option ARMs "DO" have their place....An example would be if you were an investor who purchases rental properties in an appreciating market and you were looking for cash flow and intended on selling the rental before 5 years or at least getting out of the Option ARM before 5 years. But this example is one of the very few instances when I think an Option ARM can benefit especially if the borrower knows what they are doing....
An MMA is Completely different and NO where nearly related to a Negative amortization option arm type loan. The power of an MMA lies in the use of a small HELOC line in second position to accelerate your current First Mortgage. An MMA set up with small "second" position HELOC that WILL NOT recast for at least 10 years against a Conforming 30 year fixed mortgage with NO pre-payment penalties specifically, is powerful that is.
For the MMA to work its magic, ideally, you should always be keeping the "total drawn" line amount at an extremely low level as you cycle your income through it and make additional principle pay-downs on your already established first mortgage...It does you NO justice to constantly Max-out your line amount on purchases that you would have not normally made if you did not have the HELOC in the first place If you intend to accelerate your first mortgage. Your Home is NOT a Credit Card and a HELOC should NOT be treated like one...
But an MMA works wonderfully for the "disciplined individual". Say you have a 30 year Fixed at 6% at 80% LTV (loan amount does not really matter for this purpose) and then you get a HELOC total Line amount of 15% LTV / 95% CLTV and cycle you income through the HELOC using it like you would use your Regular checking account...There would be NO possible way to go "Neg Am" in this scenario. You would only have the "opportunity" to accelerate your First mortgage by making "Forced" principle pay-downs as your income cycling through the HELOC exceeds the total current Drawn amount.
We All know that a HELOCs payment is based on the outstanding currently drawn amount against the line. So if your pay checks are direct deposited into the HELOC instead of a regular checking account it is constantly paying down the line thorough-out the month Not only is your payment on the HELOC automatically made through the direct deposits of your pay check but the amount of interest accumulated and charged against you is minimal, BECAUSE you are keeping the total drawn amount at a constant minimum.
I think the individuals here on Active Rain lumped together MMA's and Option arms because they themselves do not understand the difference and because they are "relatively" new in the public awareness and can appear "gimmicky" if they are not understood properly...But that is about the ONLY similarity...
I implore EVERYONE to take the time to understand what an MMA actually is and judge for yourself how it is NOTHING like a Negative amortization Option ARM Loan. Just Go to http://www.loanacceleration.net/ and watch the various videos and Visual presentations to get a clear understand of the POWER of an MMA
Thanks
Keith
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