One of the ad on cnn says: $510,000.00 mortgage for under $1,698/month. What is the truth?

Question

I am afraid. Can a money lender fool me?

Answer 1

Simply do the math.

A 5% interest only loan would be 25,500/yr => $2125.00/month.

So, this must be a negative amortization loan. In English that means you are not paying down on the principal, but in fact the principal is getting larger (normal amortization being positive - this being negative). Looks like this payment is based on an interest rate of ~ 3.99%

1) It IS a negative amortization rate or a temporary buydown - I would guess the former
2) It is NOT including taxes or insurance
3) This loan is for a very select few people and since the market turned, it makes almost no sense to use except for rare occasions (e.g. your 10 million trust fund kicks in two years from now and you don't care about money other than to spend as little as possible today - damn the consequences).

If the lender has an honest bone in his body, they should disclose the drawbacks to you and make sure you fully understand what the program means. If they do not - run away.

Best of luck!

Joe...

Answer 2

This looks like one of those option arm loans that have a minimum payment usually 30% less than the interest only payment. Based upon your example lets view the loan offered.

Minimum Payment $1,697.99 month, you will be just under $1,698, if was a dollar less they would boast under $1,697/month. = $510,000 @1.25% x 30 years

This is $958.26 per month lower than the interest due so it gets added to your principal balance. Example 12 months minimum payments made creates a new loan balance of $522,475.12 by adding $11,474.12 deferred interest to your original loan amount.
This will take the negative interest due and add it to your principal balance.

In essence you are reborrowing with more interest the same money already borrowed. Banks love these loans as they make a windfall for them. These are very much similar to those payday loans in how they create higher a than legal usury rate.

An Interest only payment @ 6.25% would be $2,656.25

A 30 year Principal and Interest payment @ 6.25$ =$3,140.15

A 15 year Principal and Interest payment @ 6.25% =$4,372.85
This again is a bad feature as they will use the rate for a 30 year term and not allow you the lower rate associated with the shorter term. It is true you would save some interest, but a straight 15 year loan will get you a lower rate.

It could also just be the short term teaser rate as another responder pointed out.

The danger with these hybrid loans is that they can negatively amortize. Most will have a 15% negative cap that triggers a recast or acceleration clause,neither of which are good. In a flat market you can be 15% negative in only a few years yet have a hard pre pay penalty for 3 years.

This loan at minimum payment would hit that mark $586,500.00 in 90 months if the index used stayed level. The index will change and your timeframe can only become much shorter.

I have a new client that got duped into using a countrywide option arm and 34 months after closing her loan owes $26,729 more than she borrowed, and has to wait 2 more months or has a $14,500 prepay penalty. I cannot strongly enough recommend that one doesnt ever consider this sort of loan.

Answer 3

First there are mortgage calculators available on line. So you can check these folks and keep them honest.

The loan you are discussing is either an interest only loan or an ARM as discussed by earlier responders. That payment, at best is only principal and interest (a teaser interest at that). It absolutely does not include taxes and insurance. I find it best to pay the mortgage company those included in the payment because my wife is incapable of saving a cent. The last possible thing about that loan is that it may be a 40 year loan as opposed to a 30 year.

Time on a loan will bring it down some but compare the payments on a 25, 30 and 40 year loan before you sign for any of them. Typically the interest will be a slight bit lower for the shorter time period loans and frequently a few dollars a month can trim years off a mortgage.

As a guy who fools around in this market some, may I suggest you look into homes that are approaching foreclosure. There are literally thousands of them out there. People bought 500K houses with interest only or teaser ARMs then the house value dropped (in my area 26%) and besides the payments are starting to grow. A lot of people are loosing their homes; they just didn't buy in a conservative fashion. A kid I know is probably going to loose his to this situation. He just wouldn't listen and had to have too much house.

Sorry, got a bit long winded. That happens when you set around and talk with old people...

Have a good day and good luck on your house.

Answer 4

If you notice on the ad, there is a very very fine print on the footnote of the ad. This is a 1 percent interest (am over 1 month) and it does go up - Do not be fooled (ok), there are many many different programs out there, form interst only, fixed rate at 6 percent,(and lower, depending on the lender, but rates are raising) and rates are based on credit (ok) There are also 40 - 50 year terms. There are the pay options (where you pick the payment of interest only to 30 yr fixed, just to name 2 of them). There are the 1 percent loans, and the payments do go up...Depends on how long you plan on staying in the property, and if you want to pay anything on the principle. Talk to a Mortgage Broker, one that underwrites for many many companies, one that has various programs available. If you go to one place, and they do not have a product that will help you, and they can not do the loan, you go elsewhere, and than that person pulls your credit (follow me so far?). I underwrite for 150 companies, and only pull credit one time, and my lenders go off my credit report to qualify you, and that enables me to rate shop for you. One lender may offer a 6 rate, another one may offer a 5.85 rate, another one may offer a higher rate with no MI. Or interest only for the live of the loan, or interest only for 5 - 10 years, than the payments go up, and money is applied to the principle than (when your income goes up in 5-10 years).

If I can help, let me know and good luck to you.

By the way, a loan application is called a 1003, and they will issue you a GFE (Good Faith estimate, with-in 3 days, that is per the RESPA laws, and the TIL (Truth in Lending). The GFE will tell you the up-front closing cost associated with your loan. The TIL will tell you the terms, rate associated with your loan. This is a estimate only - not the final - but it does help you figure things out

Answer 5

These mortgages that have payments that seem too good to be true (like the one you mentioned) have what is called negative amortization. In plain english that means that you are deferring today's interest payment by ADDING it to the amount you owe in the future. So that $510,000 mortgage that you borrowed today could add up to be a much larger note to pay off. You could really get into trouble if the value of the home itself drops too! Make sure your lender fully explains this to you.

Answer 6

This is probably an interest only loan, which means you never pay principal. If the housing market in your area goes down, you will end up upside down on your house. There are also some loans where you don't have to pay 100% of the interest. On these the interest gets added to the principal. Both of these are trouble, but they allow people to get more house than they can afford. Have you been hearing all the news the last year about foreclosure rates being up? These loans are one of the reason.

Answer 7

Anyone can fool you if you allow them to.

Educate yourself and work with a trusted lender only.

Answer 8

YES!!!!!!!!!!!!!! If it sounds too good to be true it is too good to be true. I would implore you to stick wit reputable lenders. Someone you can actually get back ground checks on and inquire of at the Better Business Bureau. Please don't get pulled into a scheme that will bring you heartbreak.

Answer 9

Sure. It is likely an ARM with a low teaser rate, like 1.9%. After a few months or year, it jumps to prime +- x%.

Answer 10

Yes! I would never try one of those kind of adds. Because most of the time they just want to steal your personal info.