Equal Home Finance Bureau ALERTS!

Beware NegAm Loans - Other Questions

Hi, Equal Home!

I am working with a good friend on purchasing a home loan for property. I am refinancing my present home.

She swears that neg. amortization is a good loan to purchase if one pays $100- 200 a month extra towards the principal. Is this true? I am leery, as everything I read on the web is negative towards these loans. I want to accrue as much equity as soon as possible. Thanks for your time!

I am also being set up on refinancing my loan with $3000 charge for loan origination fees and points, is that normal?

Regards,
K.

Dear K.,

Thank you for your questions.

First. Yes, the reason why negative amortization loans get such bad press is because it is well-deserved. We would argue that "NegAm Loans" are only for those who feel they have real mastery of the financial markets and their finances - in other words, real estate professionals who are using NegAm loans to manage specific types of real estate financing transactions.

The theory is that NegAm loans have really low interest rates, but don't require full month's payments (so the loan gets bigger over time, not smaller). So, if all you do is remember to make extra payments, you can enjoy the lower interest rate, yet keep your loan balance down. Seems like a great idea, but it usually isn't.

NegAm loans often have incredibly variable interest rates that start out real low, particularly as we are experiencing in the markets now. However, those rates eventually move up and move up rapdily. (In fact, our sources show that while interst rates are expected to stay low for the next year or so, they are also expected to move up rapidly over the next five to ten years).

We have had several consumers complain that the NegAm loan they got in the beginning seemed like the greatest bargain, but one to two years later, these consumers found themselves with interest rates higher than anyone else they knew. Coupled with the fact that you have to pay closing fees and other costs (and your time) the next refinancing might not be worth it. But consuemrs find themselves forced to because of the skyrocketing interest rate on the NegAm loan. Again, Beware negative amortization loans.

Your Second Question. Whether or not $3,000 is a lot or a little depends on many, many factors. These include whether or not you are paying closing costs or the lender is paying the for you, the loan balance, the loan relative to the purchase price of the home, your credit rating, etc. Each of these adjusts the "cost" of your loan higher or lower. The problem is that it becomes very difficult for someone who is not an expert in the mortgage industry to learn all of this. So, instead the key is a specific type of comparison shopping, designed to save money and yet also save you the problem of becoming a mortgage expert.

Good luck with your home finance.

Best regards,
The Equal Home Finance Bureau

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