Beside APR on negative amortization mortgage loans, what else should I know?


APR on negative amortization loans is usually quoted on the TIL (truth-in-lending) form. It is not going to be somewhere between 1-3%, as many borrowers are convinced the APR of Option ARMs is.

The APR of this type of mortgages is likely to be at least slightly higher than the APR of a Hybrid 5/1 ARM and can be up to 6% higher than the advertised rate.

APR on negative amortization home loans is not so important.

The APR will make Neg Am loans comparable. However, APR number on ARM loans is not of great value. There are other more important things to know about negative amortization loans and the most important is to know why you are taking one.

A deferred interest loan (the way negatively amortizing loans were introduced) allows flexibility of payment. For example, borrowers with erratic income who can't afford the fully amortizing option every month could pay interest only, when they need it and avoid negative amortization and deferring interest. Or, they could use the minimum payment option if they need it, but then could catch up with payments. It is important to know that using up the minimum payment (unless precise and well-calculated) can cause early sale, or refinance or bring foreclosure.

Some lenders think negative amortization mortgage loans are not for the masses.

They wouldn't recommend those loans for acquiring owner-occupied real estate, but rather as investment tools. Some of them would allow an Option ARM to a homeowner with $1,000,000 property and over 30% equity, but won't approve lending the money to a 25-year-old young man with $40,000 annual income trying to get a house of $300,000 in Santa Monica.

However, recent statistics shows that almost half of first-time homeowners loans made in metropolitan areas are exactly mortgage loans with negative amortization, so clearly some consumers are learning to count on more complicated home loans to acquire property.

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