Loans With 1% Minimum Payment? Be careful Get Informed!

These types of loans are called “option arms” and they are variable. Borrowers, who choose to make the minimum payment, accumulate deferred interest also called “negative amortization”. This type of loans best serves financially savvy borrowers with fluctuating income, financially sophisticated borrowers who understand the rewards and risks of a hands-on approach to cash management.

This type of loan has 4 options of payment. Lets say the loan is for $360,000 at 6% on the note and the 1-month teaser of 1%.

Option 1: Minimum payment: This payment is calculated with the 1-month teaser rate of 1%. The minimum payment required is only $1,157.90. With this option the principal of the loan will increase with time.
Option 2. Interest only: This payment, $1,800.00, only covers the interest payments at 6%. The principal of the loan does not reduce with time but doest not grow either compared to the minimum payment.
Option 3 Fully 30 year amortized payment brings your principal lower each year. The payment is $2,158.38 at 6%
Option 4 Fully 15 year amortized payment brings your principal lower each year. The payment is $3,037.89 at 6%

When you make the minimum payment, the difference between the minimum payment $1,157.90 and $1,800 accrued interest is added to your loan balance as deferred interest (negative amortization). Each month the index, and therefore the interest rate changes therefore the difference between the two payments could get bigger and therefore added to the principal.

The minimum payment remains fixed for one year, at which time it will increase by 7.5%, and continue to do so for each year for the first five years. The first year the minimum payment is $1,157.90, year two, $1244.74, year three $1,338.10, year four $1,438.46 and $1,546.34 for year five.

At the end of five years or if the loan balance reaches 115%, of the original amount ($360,000) whichever occurs first, the minimum payment and interest only payment option go away. You must make payments necessary to amortize the loan over the remaining twenty-five years. And since the interest rate changes each month, the payments will also change.

November 13th, 2005 · Filed Under Mortgage - Loan Information, Real Estate & Mortgage FRAUD

Comments

6 Responses to “Loans With 1% Minimum Payment? *Be careful* Get Informed!”

Real Estate market bubble burst!!?? : My Home is My Investment on October 19th, 2007 11:11 AM

[...] there are now many people able to purchase a home. Now, just because lenders have been offering “generous” programs should not encourage people to go out and obtain any type of loan available. Many loans [...]
Realtors warn borrowers about risk of specialty loans : My Home is My Investment on October 19th, 2007 11:17 AM

[...] based on fluctuations in the interest-rate index. Another popular type of loan is known as Option ARM (I explained the basics in my previous blog). When a borrower chooses to make the minimum payment [...]
ARMs keep getting riskier as time passes by : My Home is My Investment on October 19th, 2007 11:25 AM

[...] with soon to end hybrid ARM or interest-only ARM are those people that were enticed to take out an negative amortization ARM loan, most commonly known as “Option ARM” where they make minimum payments of 1% or less. The [...]
Fraud scheme in San Jose from Norma Valdovinos Century 21 Golden Hills on November 10th, 2007 6:45 AM

[...] families suing Norma Valdovinos, Linda Tran, Pablo Curiel, and the brokers, were arranged with Option Arm loans as their first and biggest loan, a second Heloc loan and the third loan coming from Pablo Curiel at [...]
Hidden cost or NO closing cost refinance could be predatory lending on January 11th, 2008 2:26 AM

[...] was pressuring the homeowners to refinance their home into an Option ARM loan also known as the Negative Amortization loan. He vaguely offered them other options but was very persistent about the Option ARM. He even went [...]
FHA Modernization Act of 2007 passed by the Senate : San Jose-Santa Clara County Real Estate UNCENSORED on November 14th, 2008 1:33 PM

[...] peak of the real estate market with zero down using a combination of “interest only” loans, “negative arm” loans and “Heloc” [...]