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The answer is it doesn't.
The only thing that reduces neg am is interest and principal payments.
In reality, extending the amortization time would have a growing effect
on neg am not a shrinking one.
Compare the total interest paid for a loan at 6.00% for a) 30 years; b)
40 years. You will pay 115, xxx in mortgage interest in 30 years
(approx. 3,8xx per year) vs. 164,xxx in mortgage interst for 40 years
(approx. 4,1xx per year). This is due to the negative effects of
compound interest and extended time.
Anyone that is selling this loan and doesn't understand the math and
computations shouldn't be Can you explain to the borrower what could
potentially happen under three rate scenerios (best case, worst case,
mean average)? how can you truly say that you are doing right by
someone when you cannot understand the math?
There are only two ways to decrease neg am in any neg am loan:
1. Increase the monthly payment amount (to compensate for the
accumulation of neg am; making interest only payments negates the
creation of neg am; making fully amortized payments reduces the future
possibility of neg am).
2. Increase the frequency of payments (combine neg am with bi-weekly
and reduce the mortgage shelf life from 30 to 26 years and reduce the
total accumulated neg am exposure by a min. of 33%).
I know these products inside and out, so much so, that I do not
recommend them for everyone and I do not recommend that everyone be
allowed to sell them.
Regards,
Scott Miller
National Commercial and Residential Lender/Broker
Carteret Mortgage
1.877.716.6495
EZMortgageLoanz@aol.com
www.RealEstate-IQ.com
www.EZMortgageLoanz.com
M.D. wrote:
> 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.
>
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Re: Secrets of the Option ARM Loan (Newbie Guide)
