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| 9858 Clint Moore Road, Boca Raton, FL 33496 | Caesar: (561) 715-8630 or Eileen: (561) 271-1311 |
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Payment shock high on new adjustable mortgage
No day goes by that I do not hear from option ARM borrowers who are waking up to the realization that they have a tiger by the tail that is soon going to bite them. The very low mortgage payment that sucked them in has resulted in a growing loan balance, and soon their payment is going to jump to the level needed to pay off that swollen balance. The payment increases that loom on their horizons can be frighteningly large, and most of those who write me are justifiably frightened. What these borrowers can or can't do to extricate themselves is a topic for another article (or 10). The focus of this article is whether borrowers are less likely to be led astray by the new version of the option ARM than by the old one. Both versions offer the same four payment options: * Minimum payment, which doesn't cover the interest, resulting in a rising balance. * Interest-only payment, which results in a constant balance. * Fully amortizing payment on a 30-year schedule, which results in a declining balance. * Fully amortizing payment on a 15-year schedule, which results in a more rapidly declining balance. Of course, the great majority of borrowers select the minimum-payment option, which is the one that gets them into trouble. On the positive side, the initial interest rate on the new option ARM is fixed for five years, instead of adjusting monthly as on the old version. This makes the new version easier to understand and more transparent. The minimum payment on the new version is calculated at a rate that is 3 percentage points below the interest rate. Here is an example taken from Amerisave.com, which offers it. The lowest rate on Feb. 20 was 5.875 percent, with an initial payment on a $100,000 loan of $240, calculated at 2.875 percent. The difference between interest calculated at 2.875 percent and interest calculated at 5.875 percent is added to the balance, which grows every month. However, the balance cannot exceed 115 percent of the original balance, or $115,000. This is the "negative amortization cap." Hunting for the perfect home in Grand Orchid? Realtor® Caesar Parisi is ready to help you buy your dream property. click here for article |
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