MortgagesUndressed

Does this headline mean 1% of the loans are fraudulant? Sorry, no. According to the feds, its higher than that. This is about fraud and the 1% loan.

I am going to make this a multiple part article. You may have noticed that a low, even 1% loan is often marketed. it is an attention getter since most people are rate conscious. I don’t want to condemn this product, rather undress a few facts about it. I even have a tragic, true story to share of a loan officer gone beserk with the 1% loan.

Several lenders offer this loan, so the specifics may vary from lender to lender, but it is my experience that much is in common between them.

It is of this commonality I write of. This is a topic professionals may want to join in and offer their input. They are welcome. My opinion is that it has it’s place as a good product for the right situations.

Initially I will say I had this loan myself once and that I sold it twice. All three of these had the same product characteristics so I will use them for these articles. The terrible story I will then unfold, used exactly the same product.

This loan is an ARM or adjustable rate mortgage. It has a very low initial rate, or start rate. Even 1% with some lenders. The initial rate lasts for a very short period of time; 1, 2, 3, or 6 months (usually).

What makes this loan very unique is that the very low start rate can continue as a payment, even as the interest rate the borrower is charged increases. When the payments is at 1% but the rate is 8%, how can that be? It is called neg am, or negative amortization.

I haven’t seen one advertisement use negative amortization or neg am in their advertisements. I wonder why? Do you see what we mean by undressed or exposed?

I will give you more product details later, but now explain why I sold this product twice. Both were in response to the same plea from single mother clients. Their stories were the same. “I need to keep this home. My kids are in school, I got the house in my divorce. I can’t afford the payments, but I don’t want to move my kids. I will sell the home when they are out of school. What can you do for me?

Here the neg am loan made sense. The initial low payments worked for them.

They had equity in their homes when they were at this point. This equity would be at risk if the value of the home went down. Why? Picture the difference in the required payment to the payment at the higher rate as a new second mortgage on your home. Each month the second mortgage increases by the difference between the two. The lenders will only let this go on for about 5 years and the loan must be refinanced. Five years worked for these two women.

These loans were funded years ago, way before the housing boom. Both borrowers are still in their home. One had to go into the job force for the first time in years. She started with a low pay but has seen that gradually increase. She has refinanced during the low rate period. She is fine. The second woman also refinanced. While she had a good paying career she had a lot of responsbilities. Both homes have increased in value significantly. This product helped them.

Note, they both knew exactly what they were buying.

There are times when borrowers are sold this loan withoug really understanding all they are into.

Next, why did I take out one of these loans? The answer is another reason to consider it.