Home Mortgages: How About Those 1.75% Loans?

You’ve undoubtedly heard or seen advertisements for mortgages with very low interest rates such as as 1.75%. For example, one mortgage company in the city where I dwell is advertisement a 40-year mortgage with a 1.75% interest rate. That sounds like a pretty good deal, doesn’t it? After all, if you were to purchase a house for $250,000 with this rate, your payment (not including taxes and insurance) would be only $632 a month.

Maybe this mortgage would be a good deal for you. But before you jump to the phone or fill up out an application, do certain you understand how these mortgages work.

They are called option ARMs. This is because they offer four options from which you must choose: minimum monthly payment, interest-only payment, full rule and interest amortized over 30 years, and full rule and interest amortized over 15 years.

If you take the minimum payment option, which is at the advertised 1.75% interest rate, you pay nil towards the rule and less interest than what accrues on the loan. The unpaid interest is added to the loan balance, and you go subject to what’s known as negative amortization.

In other words, as you do the minimum payment, your loan balance will go on to grow. And, if interest rates travel up, which they are most likely to do, your loan balance will turn even faster, to a point. For example, depending on your loan, when your balance attains a level, such as as 110%, 115% Oregon 125% of the original balance, the loan is “recast,” and your minimum payment travels up.

There are two dangers to the minimum payment option. The first is that the lower the “teaser” rate (usually 1.75%), the higher the possible addition in monthly payments if the interest rate travels up, as it most certainly will.

The second danger is that you could literally stop up owing more than than your house is worth, In fact, one economic expert recently said “They are a batch more dangerous (than an interest only loan) because the borrower is giving away portion of his equity, sometimes unknowingly.”

For example, on a $250,000 mortgage if the balance reached 115% owed to negative amortization, the sum mortgage would then be $230,000.

It’s hard to compare a minimum payment option arm with a five-year fixed rate, interest only loan because pf the differences between the two. However, for the interest of the example, the payment on a $250,000 minimum payment option arm the first twelvemonth could be as low as $632. However, because of negative amortization, the balance owed on your mortgage could turn to $210,000 or more than by the end of the second year.

In comparison, a 5-year, fixed rate, interest only loan on that same $250,000 at 5.50%, would have got a monthly payment of $1145.83. This payment would stay the same for all 60 calendar months (five years) and the balance of your loan would still be $250,000.

So, what lesson is to be learned here? It is that option weaponry can salvage you money but can be very complex. You need to fully understand what you are doing before you subscribe up for one. Your loan written documents will let on the risks, so read everything carefully. The written documents may have got to state the truth, but marketing stuffs can be misleading. So read, read, read and if there is anything that isn’t clear, do your mortgage broker explicate it until you are certain you understand all the details.