Although not as popular as they were in the hands of unsophisticated borrowers and undereducated, inexperienced "loan officers" the 12 Month Treasury Average indexed loan has long been a great choice for borrowers who have a wealth plan and understand their home, contrary to the statements of that "Rich Dad Poor Dad" author, is one of the greatest assets they will ever posses. Yes, I am saying Robert Kyosaki is wrong about your home being a liability and not an asset. If you agree with him please rent one of my homes from me :)
This short blog posting in no way will present the case for using the 12MTA and a Payment Option ARM based on the 12MTA. Let me add this: If you have any doubt in your ability to play by the "rules" on this type of a loan you do not need to use it! Why am I even reviewing this loan that, to my knowledge, is available only to the very select few who have a heavy banking relationship and impeccable credit? Because it may, one day, return. I defended this loan while it was being abused and threw truth at the fact that it wasn't "the loan" it was "the loan officers" and "unsophisticated borrowers" getting together to use it as a tool for greed instead of a tool for wealth management.
Furthermore I hope this loan comes back. One of you reading this right now may actually deserve it and know how to use it! Very quickly the reason I like this loan is for people, like myself, who may not make a steady salary. Some months I sell more books and seminars, some months my company closes more loans, some months are slow. Some months I like to invest my money in something that has a tremendous opportunity for good returns such as a hard money loan. So let me think, I can lend someone $50,000 for 5% origination and 15% interest for 6months or I can make 6 months of house payments ... no thanks, I'm glad I have the choice. Whatever my choice - my choice!
So how do these loans really work? The 12 month treasury average is easy to follow. The chart below this paragraph shows it. All loans, whether fixed or adjusting, are based on some index. The 12MTA is the index for this particular loan. On top of the index is the margin. My margin is 2.25% so if the 12MTA is 2.5% my adjustable interest rate is 4.75%
The figures above are from July of each of those months so if I paid the Interest Only amount from each of these months you can see I have had some very low interest rates and some rates a little higher than average. Currently my option of the Interest Only and Reverse Amortizing Minimum Payment have been getting better for the last several month. My fixed 30 and fixed 15 options, of course, are the same as they have been since I took out the loan 3 years ago.
The Ugly Side
The ugly side of this loan is if you don't have real equity and you pay the minimum payment (the reverse amortizing option) every month and you reach the limit of your original loan, you can get hit with the loss of the option at the end of the period. Mine is set up to recast or lose the minimum payment option when my principle amount reaches 110% of the original loan amount. Don't worry - I still would have plenty of equity available and anyone using this loan should, too.
You can get upside down -- although I never did many of these loans and certainly would never have offered one to anyone who stood the chance to owe more than their home was worth. These are the loans that let the lower end of the lending spectrum advertise "A $450,000 home for $625 per month!" and they used it to get people into homes they otherwise could not qualify for. I'll be very honest and say that if I applied for my home loan today I would not qualify on DTI. Three years ago I qualified easily, even without my wife on the loan. So I have paid some minimum payments over the last 18 months - thank goodness I have this loan and not a fixed payment choice only! I am, after all, dependent on the real estate world, primarily jumbo homes, investors and commercial buyers, to earn a living.
The "trick" is that earlier I paid additional principle reduction payments when I had a windfall or didn't need to invest in something else. Likewise, as the market turns, I will do the same. At year end we used to take a partner's equity payout and use that to invest or pay down principle. Then again, there are arguments about not even do that.
The bottom line is savvy people need options and this junk we have just come through in the industry took options away from people who knew how to use them and had the discipline to do so - when the smoke clears hopefully we'll get back to common sense lending options. (Fingerprinting loan officers won't do anything to make them smarter - but your Democratic congressmen insisted that be in HR 3221 and it passed. Don't you feel safer?)
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