The right time for negative amortization loans

With investors sitting the fences waiting for the market to rebound this is a good time to discuss how to use an “Option ARM” or “Negative Amortization” loan to your advantage. There is a right time and a wrong time to select this type of financing.

First lets define a negative amortization loan. With this loan you are given 4 payment options each month:

• 15 Year Amortized Payment
• 30 Year Amortized Payment
• Interest Only Payment
• Minimum Payment (negative amortization)

Only the minimum payment option will create negative amortization but those who take this loan are only interested in making the lowest payment possible. Therefore, 15 year and 30 year amortized payments are usually not the choice of those who take these loans. It is not a loan for a long term solution, or for anyone in a high loan - value ratio property.

This loan is very suitable for 1 - 3 year outlooks and in cases where at least 20% equity exists in the property. It is excellent for investors who will be able to negotiate a good deal in the rebounding market and want to leverage as much as they can. The Option Arm helps these investors afford more property for their money. Used properly, it can be very effective.

Unfortunately, the vast majority of loan officers are too eager to put homeowners into these loans when it is not the right choice. They make a healthy commission and can cover closing costs. That is the candy that hooks the borrower. If you can only afford the minimum payment on a loan like this…you can not afford the property…period.

Popularity: 2% [?]