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Hello Rainmaker, Im a Mortgage Broker rookie, so my question is if you can
please explain why and how a 40-year amortization reduces the amount of
neg-am every month, thank you.
"Rainmaker" <brigadoon_8at@junodot.com> wrote in message
news:126bqv23e0dmjfb@corp.supernews.com...
> Actually, M.D. DID get it right, he/she just didn't clarify it very well.
>
> With the MTA Option ARMs that I offer, if you read the promissory note,
> you will see that the first month payment IS a fully amortized payment at
> the start rate, but only for the first month. In month two, the fully
> indexed rate kicks in, as does neg-am.
>
> But, I am a direct lender (not a broker), and I acknowledge that some
> programs may be different. Also, we offer a 40-year amortization, which
> reduces the amount of neg-am every month.
>
> Since I am on my soap box, we also offer a fixed minimum payment for
> five-years, and a fixed-payment/fixed-rate, for five years. Of course
> those benefits are reflected in the start-rate and margin. Lastly, we
> offer these loans with LPMI.
>
> For you brokers, I believe that these programs are offered through our
> wholesale lending division, ABC (American Brokers Conduit,
> (www.abconduit.com). If you're interested, go take a look.
>
> "Jeff Strickland" <crwlr@yahoo.com> wrote in message
> news:JdmdnXVuCa61RP7ZnZ2dnUVZ_v2dnZ2d@ez2.net...
>>
>> "M.D." <delanuel@bellsouth.net> wrote in message
>> news:49M8g.20865$Sl4.6632@bignews1.bellsouth.net...
>>> Something for the newbies (im one of them, lol) in the mortgage
>>> industry, hope this helps:
>>>
>>>
>>> *************************************
>>> How Does an Option ARM Loan Work?
>>>
>>> Option ARM (also called Pick A Payment or Pay Option ARM) loans work by
>>> providing the borrower with four payment options each month.
>>>
>>> Before we get into the payment options, let's review some of the
>>> important terms and concepts involved with this loan program.
>>>
>>> ARM - Adjustable Rate Mortgage. An ARM is a mortgage whose interest rate
>>> is raised or lowered at periodic intervals according to the prevailing
>>> interest rates in the market. Also called variable-rate mortgage.
>>>
>>> Principle - The original amount of money provided in a loan is the
>>> principle. This amount, plus the interest accrued must be paid back in
>>> full by the end of the loan's term.
>>>
>>> Interest - Interest is the cost paid to borrow the money.
>>>
>>> Start Rate - The initial rate of the mortgage. This rate is the rate
>>> that the "minimum" payment option is based on. Typically this rate will
>>> range from 1-2%.
>>>
>>> Amortization - The process of paying down the principle balance of a
>>> loan. A fully amortized loan is a loan that will be paid off completely
>>> through the monthly payments by the end of the loan's term.
>>>
>>> Negative Amortization - Negative Amortization or "neg am" is the process
>>> of adding unpaid interest to the principle balance of the loan. If you
>>> make a "minimum payment," the difference between that payment and the
>>> interest only payment will be added to the principal balance of your
>>> loan.
>>>
>>> Index - An index is a measure of a particular security or other monetary
>>> instrument that can be used to adjust interest rates. Index examples
>>> include US Treasury Bond valuations, LIBOR (London Inter Bank Offering
>>> Rate), COFI (Cost of Funds Index), and MTA (Monthly Treasury Average).
>>> Indexes can adjust on a daily basis.
>>>
>>> Margin - Margin is the difference between the Index and the rate on a
>>> loan.
>>>
>>> Fully Indexed Rate - The fully indexed rate is calculated by adding the
>>> Index to the Margin. For example, if Libor was 3.0% and the margin on
>>> the loan was 2%, the fully indexed rate would be 5% (Index + Margin).
>>> The fully indexed rate is the rate that your loan accrues interest at.
>>>
>>> Now that we've covered the basic terms, let's examine the four payment
>>> options
>>>
>>> These payment options are:
>>>
>>> 1) Minimum Payment
>>>
>>> This payment is a 30 year amortized payment based on the start rate of
>>> the loan. When the minimum payment is made, the difference between the
>>> minimum payment and the interest only payment is added to the principle
>>> balance of the loan.
>>>
>>
>> You were doing pretty good up to here. There are two sentences here, the
>> first is patently wrong, the second is correct. There is no amoritization
>> that happens, except for negative amoritization, with the minimum
>> payment. The minimum payment typically won't even pay the current
>> interest that is due on the note, and the shortfall is added to the back
>> end of the loan as a negative amortization. The negative will not be
>> allowed to exceed 125% of the original loan amount.
>>
>>
>>
>>> This payment is lowest possible payment and lets you keep more cash in
>>> your pocket each month. This payment typically changes annually and is
>>> recalculated based on the remaining principal balance of the loan, the
>>> remaining loan term, and the current interest rate. A payment cap is
>>> usually applied to ensure that they payment does not swing wildly from
>>> year to year. A typical payment cap is 7%. For example, if your minimum
>>> payment was $1,000 in year one, the most it would be in year two is
>>> $1,070 and the least it would be is $930.
>>>
>>> 2) Interest Only Payment
>>>
>>> This payment is based on the fully indexed rate. These payments don't
>>> pay down the principal balance of the loan.
>>>
>>> In order to avoid deferred interest and negative amortization, each
>>> month you will be given the option to make an interest only payment.
>>> This allows you the benefit of keeping a low monthly payment and keeps
>>> the principal balance of your loan at the same amount.
>>>
>>> 3) 30 Year Fixed Payment
>>>
>>> This payment is based on the fully indexed rate. These payments do pay
>>> down the principal balance of the loan.
>>>
>>> It's calculated each month based on the prior month's interest rate,
>>> loan balance and remaining loan term. When you choose this option, you
>>> reduce your principal and pay off your loan on schedule.
>>>
>>> 4) 15 Year Fixed Payment
>>>
>>> ly indexed rate. These payments do pay down principal balance of the
>>> loan.
>>>
>>> If you want to build equity faster, pay off your loan quicker and save
>>> on interest, this is the option for you. It's calculated to amortize
>>> your loan based on a 15-year term from the first payment due date.
>>>
>>> Let's take a look at a couple of examples.
>>>
>>> Example 1:
>>>
>>> $250,000 Loan Amount - 1.25% Start Rate - 5.5% Fully Indexed Rate
>>>
>>> Payment #1 (Minimum Payment) - $833.13
>>> Payment #2 (Interest Only Payment) - $1,145.83
>>>
>>>
>>> Example 2
>>>
>>> $450,000 Loan Amount - 1.25% Start Rate - 5.5% Fully Indexed Rate
>>>
>>> Payment #1 (Minimum Payment) - $1,499.63
>>>
>>>
>>> As you can see, there can be quite a difference between payment options!
>>>
>>> If you want to run your own scenarios, We've built a simple, Excel
>>> based, Pay Option Calculator that you can download for free. Check out
>>> the resource box below for information on how to download this great
>>> little tool.
>>>
>>> Hopefully, this gave you some insight into what an Option ARM loan is
>>> and how it works.
>>>
>>> If you are interested in learning more about this program, and if you
>>> are eligible for it, your next step should be contacting a mortgage
>>> professional.
>>>
>>> IMPORTANT NOTICE
>>>
>>> Beware companies or individuals that make you put money down or order an
>>> appraisal BEFORE they agree to discuss your situation with you. Also, be
>>> wary of those who won't talk to you until they pull your credit report.
>>> While a credit report will be necessary if you decide to go forward, you
>>> have the right to talk to someone about your options before they look at
>>> your credit. These are frequently just sales tactics to make you feel
>>> like you are obligated to go forward with that particular broker or
>>> lender.
>>>
>>> Joe Ramirez and HomeLoanInfoCenter.net put today's confusing loan
>>> programs into easy to understand terms. Run your own loan scenarios with
>>> a free copy of our Pay Option ARM Calculator.
>>>
>>> Article Source: http://EzineArticles.com/?expert=Joe_Ramirez
>>>
>>>
>>>
>>>
>>
>
>
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Re: Secrets of the Option ARM Loan (Newbie Guide)
