Negative about negative
I am retired, have a lot of equity in
my home and believe a negative amortization loan will help me with cash flow,
especially in a weak economy with interest rates so low. I have been talking with
a mortgage broker who offers such a loan on a $500,000 refinance based on the
MTA (Monthly Treasury Average) one-month ARM (adjustable-rate mortgage).
The rate of 1.95 percent is said to be the rate I would pay
each month for 30 years. Month to month changes in the rate would, if upward,
be negatively amortized. At 1.95 percent, the quoted payment is $812. I received
a good faith estimate from a California bank, signed it and mailed it. Then I
learned from the broker that the loan data was wrong. Instead I was asked to go
with a larger bank that supposedly offers the same loan.
one point I was told the loan was through Fannie Mae. At another time I was told
I couldn't learn the name of the lender for competitive reasons. My questions:
(1) Does any of this make sense? The broker insists the loan is valid and that
she has over 20 years' experience working with a large bank. (2) What should I
get in writing from her before I hand $350 to an appraiser? (3) Who offers Fannie
Mae mortgage products in Orange County, Calif.? -- Jim
You've given me a lot of information about this mortgage loan
that you're interested in, but nothing about your finances other than you need
help with cash flow. If you're looking to tap the equity in your home with no
real prospect of paying down or paying off the loan balance, then you should also
consider a reverse mortgage. Fannie
Mae provides a guide to this type of mortgage that will give you enough information
to help you decide if this is the right product for you.
best advice, however, is that you hire a fee-based financial planner for a few
hours to review your finances and establish what you need to accomplish financially,
both with the refinancing and with the other aspects of your finances. The National
Association of Personal Financial Advisors can help you find a professional
in your area.
I can think of a lot better ways to tap the equity
in your home than signing up for a negative amortization loan. For readers not
familiar with negative amortization: When the interest rate resets to a higher
rate with a negative amortization ARM, the mortgage payment doesn't change. Instead,
the additional interest expense is added to the loan balance.
increased loan balance makes for higher interest expense, escalating the problem
and the loan balance over time. They're called negative amortization loans because
the loan balance increases over time.
There's not much room
for interest rates to go lower, so increasing interest rates over time will raise
the loan balance (negative amortization) while your monthly payment remains unchanged,
at least initially. The $812 a month you quote in your letter represents an interest-only
payment, so until the loan starts to amortize, there isn't a principal component
to your monthly payment. It may help with cash flow, but it won't do anything
toward paying off the note.
Mortgage brokers don't want you
to pick their brains and then drop them to go to the lender that offers the product
you want. That could be the reason your broker is being coy about who is offering
Originating lenders gain funding by selling mortgages
designed to become part of a pool of mortgages that will be sold by Fannie Mae.
Mae's Web site allows you to find a lender in your state. California has 166
listings, so it shouldn't be hard to find a few doing business in Orange County.
Monthly Treasury Average, courtesy of Bankrate's leading rates definitions, is
"an index determined by the monthly average of one-year Treasury bills. It's
an index that is used to set the cost of various variable-rate loans, particularly
adjustable-rate mortgages. Lenders use such an index, which varies, to adjust
interest rates as economic conditions change. They then add a certain number of
percentage points called a margin, which doesn't vary, to the index to establish
the interest rate you must pay. When this index goes up, interest rates on any
loans tied to it also go up. Its use as a loan index is relatively new. The MTA
generally fluctuates more than the 11th District cost-of-funds index, although
they track each other closely."
You can track the MTA
using Bankrate's Rate Watch
Finally, you don't want to pay for an appraisal
unless you're certain that the lender will accept that appraisal. So, you have
to have the lender lined up before you start hiring an appraiser.