Remember the "sleazy Option ARM advertisements"?
They're back but with a whole new twist:
This is why I never did option
arms. This is part of the reason why we are in the housing mess we are
in. Yes, borrowers have to claim responsibility, but every Bank that
pushed neg am as a financing alternative deserves the billions in write
downs and losses in stock options that they are mired in. I have no
sympathy for them...only contempt!
Oh, brother! If I see one more loan hack Monday
morning quarterbacking this mess I'm gonna puke. There is nothing
wrong with negative amortization loans; there was something drastically wrong with the way they were prescribed.
The "new neg-am" advertisements are "posited indignation" and they're
just as sleazy as the original advertisements. They prey upon the
opposite of the greed motivation; fear.
Let me try to break down the negative amortization loan for you:
- There is an interest rate charged; it may be adjustable monthly, annually, or for a specified period.
- There are payment options. One option is LESS than the interest
assessed for the month. Borrowers have the "option" to pay the minimum
amount or a higher payment.
- The difference between the lower amount paid and the higher amount
assessed is added to the loan balance. The loan balance rises or
amortizes "negatively".
- If that balance rises to a pre-determined amount (usually 110% to
125% of the original balance), all bets are off; the loan becomes a
fully-amortizing loan and the payment goes up...a lot.
Neither the neg-am loans nor the banks caused the housing mess; a
supply and demand imbalance, combined with an adolescent nature towards
understanding complicated loan products did. I'm gonna help you out with this. Neg-am loans are
neither good nor evil; they're just financial instruments. When
prescribed properly, they can be a super-charged problem solver or
liquidity builder BUT...you gotta do your homework, first.
When does a negative amortization loan make sense for you?
How about when you're looking to buy in a soon to recover market? NAR Chief Economist, Lawrence Yun believes that a V-shaped spike is due in three markets:
Middle-America cities that performed evenly over the past few years – like Cincinnati, Milwaukee and the Kansas
City, Mo., area – are likely to experience home price gains in the 20
to 30 percent range over the next five years, while markets like Miami,
Las Vegas and Phoenix could see prices go up as much as 50 percent
during that time period, Yun said.
If you're looking to buy a $300,000 home, with
$150,000 down payment, in Las Vegas, you might consider buying a rental
property in Phoenix, for $150,000, as well (geographically diversify).
Spread the $150,000 over both homes and use a negative amortization
loan to keep your payments affordable, for the recovery period. You
might sell the Phoenix rental for $225,000, in 2013, and use the extra
$50,000 to pay down the Vegas loan under $100,000, in 2013. That's
what wealthy people do. They buy low and sell high with
other people's money.
If you're saddled with debt and no lender is going to let you refinance with "cash-out",
you might need a negative amortization loan. Let's assume you're
paying $2,200/month on your $300,000 fixed rate loan and $800/month in
$40,000 in consumer debt (credit cards). In 3 years, your mortgage
balance will drop to $290,000 and your credit card balance will drop to
$27,000. If you took out a neg-am loan, with a $1,400 payment, and
applied the $800 cash-flow savings to your credit cards, you'll pay OFF
your credit card debt in 3 years. You will have INCREASED your
mortgage balance some $15,000 but you'll be swapping 14% debt for 6.5%
debt.
In
the existing scenario, you'll owe an aggregate of $317,000 in 2011.
With the neg-am loan, you'll owe an aggregate of $315,000 (on your
mortgage) but your high-interest consumer debt will have been retired.
Your credit score will most likely have risen, making your eligible for
a MUCH better loan program. Oh, you'll save a bunch of money on taxes,
as well.
Finally, maybe you have no liquidity . That's VERY dangerous
! Investing that $800 monthly difference can grow to a $35,000 nest-egg (assuming a 7% return). While the
difference in mortgage balances will be $25,000 higher, with the neg-am
loan, the investment account will have grown to $35,000; you'll be
ahead some $10,000 and have what we call in financial planning circles,
liquidity.
Oh...by the way...liquidity=safety. When the dung hits the blades, cash in the bank is king !
Here's the advice for today; don't be swayed by the fear mongers of
today; you weren't swayed by the greed merchants of yesteryear. Do
your homework, perform your due diligence, and call a mortgage adviser who has financial planning background. He'll analyze ALL of your assets and liabilities, and tailor a loan solution specifically for your situation.
After all, aren't you special enough to warrant personal attention?
