By any other name would still defer interest. (Sorry, Bill)
I normally do not open junk mail, especially when it is someone trying to sell me on refinancing my house. (Hello, I am a mortgage broker. I will do it myself, thank you.) But, I figured the other day to pop a couple open just to see what the latest product is that some of these people are pushing.
So, how are they doing it? "Your payment rate is only .375%* and is fixed for 10 years." Now, unless you read the font size 6 disclaimer at the bottom with your super strong magnifying glass, you will not catch that the real rate (the interest rate) could be as low as 6.5% and go up from there. And there is even more of a catch... they will pay my first year for me. (Based on the .375% payment rate of course.)
Let's do some math: Loan amount of $240,000. Payment rate of .375%. And an interest rate of 6.5% Amortized 30 years with a 10 year fixed rate (both payment and interest).
Oh, did I mention to that the payment rate is actually calculated on the interest only portion of the .375% payment rate?
$240,000 x .375% = $900 (This is the annual interest only payment of the .375% payment rate)
$900 / 12 = $75 (This is the minimum monthly payment that they require you to pay)... Sounds great, doesn't it?
Hang on... there is still more to calculate.
$240,000 x 6.5% = $15,600 (This is the annual interest only payment of the 6.5% interest rate)
$15,600 / 12 = $1300 (This is the monthly interest only payment that will not allow deferred interest to occur)
Let's figure out what the monthly deferred interest is using these two monthly payments.
$1300 - $75 = $1225 in DEFERRED INTEREST or MONTHLY CASH FLOW (If you want to look at the positive side of this figure)
Annual
$1225 x 12 = $14,700 in ANNUAL deferred interest, negative amortization, loss in equity, etc... or cash flow. (Want to read between the lines?... Because this mortgage company will pay the first 12 months, it is really costing $14,700 in equity unless one chooses to pay above the minimum.)
Now, this loan program not a bad thing. It becomes a bad thing when mortgage professionals wrongly sell this product. Before you rush out to get this loan because of its super-duper, ultra-low, got to go out and refinance payment and one year of payments paid by the mortgage company, please talk to a mortgage specialist, financial planner, and CPA to make sure that this program is right for you. The $14,700/year in deferred interest can add up quickly and place you in to a full payment which may cause payment shock and possible foreclosure. As wonderful as this loan may sound, it may just not be the right loan for you.
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