While much has been written about the subprime mortgage crisis, many educated, savvy and financially responsible borrowers have found themselves entangled in another sector of the mortgage meltdown: the negative amortization mortgage. This type of mortgage, when used in the proper setting, can be a boon to a borrower in certain specific circumstances. Unfortunately, the majority of consumers holding this type of mortgage have found themselves in a nightmare of rapidly increasing payments, along with rapidly decreasing equity in their property.
Consumers trying to refinance themselves out of these mortgages have found several factors working against them: 1) most of these products have a stiff prepayment penalty that adds thousands of dollars to closing costs; 2) a combination of declining market values, along with the deferred interest added to the loan, doesn't leave enough equity in the home to roll the closing costs of a refinance into the new loan; and 3) most of these loans were structured at 80% of the home's value; if there is still enough equity in the home to do a refinance, the borrower now must pay PMI (private mortgage insurance).
There are a few "tricks" that a borrower can use to refinance themselves out of this mess. The goal, obviously, is to end up in a conventional, 80% loan to value mortgage, with most of the closing costs rolled into the mortgage. You will find that your local community banks (privately held banking institutions) as well as credit unions, can be your ally. Current economic conditions have these organizations actively looking for additional deposits and income and they are willing to be creative. Consider taking a collateral loan against one of your existing assets - a car, motorcycle, boat, RV, etc., to have the additional funds needed to pay the prepayment penalty and still only finance 80% of the home's value. Some lenders will also consider giving you a signature loan (I've seen these done up to $20,000) that you can use in the same way. The lending institution may require that you open a depository account with them (checking or savings) as a part of the transaction, but that's a small "price" to pay for the benefit of a private loan.
Does it make sense to borrow money in order to pay off money? In these circumstances, I'd have to say yes. The terms of these private loans are normally quite flexible; they can often be amortized over a five or ten year period and can often be structured as a interest-only payment. If you are planning to stay in your home for more than a few years, the long-term savings benefits of getting out of a negative amortization are huge. Being able to borrow only 80% of your home's value will also save thousands of dollars in private mortgage insurance payments. While you will now be paying a monthly payment on your private loan, it will be significantly smaller than the mortgage payments you're making now, and you'll be preserving the equity you have in your home by not adding to your mortgage balance every month.
Sometimes these solutions aren't pretty, and in a perfect world, they're not the way you'd like to handle your finances, but if you can look at the long-term picture, a quick escape from a negative amortization mortgage, even by "creative" means, can only make good financial sense.
Sherry Armstrong
RE/MAX Property Centre
http://sherryarmstrong.com
386-679-3191
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