Negative Amortization Mortgages
I spoke with a broker who is offering ARM's for 1.5% or so fixed payment for 5 years for a property I am looking to buy - its a 4 family and I'll be living in one of the apartments...
Is this what people consider a negative amortized mortgage??
My question here is if the interest rates go up then my principal for this property could actually go up??
To the investors here: What are your thoughts about these type of mortgages???
Thank you!
[addsig]
ARM rates are often quoted in terms of the index rate. The lender also adds a few points (called the margin) to the index rate to arrive at your actual APR.
If this particular ARM is one of those "option" ARMs, then you can choose any of four different monthly payments each month. One payment is an interest only payment at the base index rate, another is interest only at full APR, another is a fully amortizing 30-year payment, and the fourth is a fully amortizing 15-year payment.
Most often when your payment is less than what is needed to fully amortize your loan in 30-years, you will have a negative amortization situation.
The advantage is that during months when your cash flow is pinched, you can get some relief with a flexible mortgage payment plan.
The drawback is that relying on the base rate interest only payment for any length of time could put you upside down. Some lenders have remedies for this by recasting your loan at the end of the fixed rate term, so that your remaining balance (to include any deferred interest payments) is fully amortized in the remaining years of the loan term with your minimum payments adjusted accordingly.
I personally don't use the interest only payment feature of my ARMs, preferring instead to make the payment each month that fully amortizes my loan in 30 years. My goal is to have my property owned free and clear courtesy of my tenants. So my long term holding approach does not fit well with an interst only payment strategy.
If your holding period will be only a couple of years, and if the property appreciates at a rate faster than your negative amortization, then you may find this loan feature appealing.
Caution: Since deferred interest is added to the outstanding principal balance, you might end up paying interest on your deferred interest.[ Edited by DaveT on Date 05/18/2004 ]
Don't be afraid! I have the 1 month option ARM on all of my properties and I absolutely love it, but only because it fits my investment goals. I have primarily income properties (single family and multi unit) and my goal is monthly cash flow, so I'm not that concerned about negative amortization. The MTA index had traditionally outperformed others, so look it up on the internet to get some statistics.
Just be aware - the 1.5% is a "teaser" rate, your fully indexed rate will be somewhere around 3.6 to 3.9 % depending on the program. Honestly, the difference between my "minimum payment" and "fully indexed rate" is only about $80 per month, so it's quite painless to make the full payment.
If you're looking for good cash flow - this program is the way to go.