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Trapped with a Negative Amortization Loan? Steps to Move to A Fixed Rate Loan |
By Paul Chavez
 Foreclosure rates are still on the rise, leading some lenders to fail, and leaving millions of Americans without a home of their own. Fannie Mae and Freddie Mac needed a "bail-out" of themselves from the government. The foreclosures are still occurring, with another wave about to begin in 2009.
Many of these will be Pay Option Arm borrowers. This is what is known as a Negative Amortization loan, something that has greatly increased in popularity over the course of the last five years. Don't be surprised if congress passes a bill to prevent these loans from being sold to unsuspecting borrowers in the near future.
There are four payments options every month with the Pay Option Arm. The "minimum" Negative AM payment, interest only, 30-year (interest and principal amount)
and 15-year (principal and interest). Minimum monthly payments were based on a teaser rate of somewhere between 1%-4% that provided negative amortization on the loan.25%. While a person may be able to get this loan, it is often the case that a qualified borrower may only be able to make the minimum
negative amortization payment each month. The interest only, 30-year fixed and 15-year fixed payments are based on whatever index the loan was based on, such as LIBOR, COFI, CODI, MTA, etc., plus the margin giving you the fully indexed rate. Usually the fully indexed rate (index + margin) Many interest rates are closer to 8% and 9% rather than the range of 7-9% listed. Most borrowers therefore paid the minimum negative amortization payment of 1% which gave them a substantially smaller payment - but increased their mortgage balance with each payment.
A lot of people aren't aware of the term "recast" and therefore may not be aware that they may be facing foreclosure because of this "recast" feature built into their Pay Option Arm loan. This information is essential.
Recasting percentages differ based on the lender. The majority recast at one hundred ten to one hundred fifteen percent. To the borrower this means that if he has made payments of only the negative amortization minimum payment per month for over 3 years or close to 3 years, the loan will be recast much sooner than expected. When the loan recasts, the teaser 1% minimum negative amortization and interest only payment options disappear.
The borrower is left with only two payment options, the 30-year and 15-year fixed payment options at the fully indexed rate of 8% plus. Not only that, all of the negative amortization or as the lenders call it, "deferred interest" has increased your original loan balance at the same time their property values are falling in value. Result, most borrowers in Pay Option Arms find themselves upside down with no options other than to walk away or attempt a short sale.
Either way they either severely damage their credit or walk away with no money and sometimes have to pay taxes on the loss from the short sale.
Depending on when your loan is set to recast - you can find this information on the "Note" with your original loan documents. It may say "Adjustable Note," etc. The key word is note. If your loan is set to recast at 110% of the "original" loan balance, if you do the math you can expect to recast in about 3 years. When the terms on the note say it is a 115% recast, it will be less than 5 years before it will be recast. Either way, borrower's will then find themselves with a payment they cannot afford and they won't be able to refinance because they will most likely either be upside down or have very little to no equity. Essentially leaving them stuck in their Pay Option Arm with no way of converting into a fixed rate mortgage.
When given the option or selling their home or being able to renegotiate their current loan, keep the payments affordable and convert to a fixed rate mortgage - statistics indicate most borrowers would ultimately choose to keep their home.
Loan Modification is a great option to help you with this. A loan modification is when the lender modifies your current mortgage in order to work with you because of a hardship. Making your loan more affordable is the purpose. Usually it is in the form of a rate reduction and conversion of an ARM, typically a 30 year fixed.
Previously, this was only available if the borrower was behind in his or her payments and had experienced some kind of hardship, such as a job loss, divorce or illness. Home owners that still are paying a mortgage can seek assistance from their banks for affordable rates.
Loan Modification services should include the initial consultation, compiling the full application, the processing of the application, the underwriting of the proposal, written legal contract of the proposal, legal department's made up of brokers, attorneys, and paralegals communication for negotiation of the proposed modification, final resolution of the proposal and the final step which is executing the new contract and modifying the loan to meet your needs.
Paul Chavez ia a Real Estate Broker ,licensed in California ,that has over 10 years of experience behind him mainly dealing with out-of-court resolutions of Mortgage Foreclosures by talking to your lender for you to let you continue to live in your home while making lower payments . Free consultation, no obligation. Let our expertise help you save your home. With our assistance, Foreclosure doesn't have to be your only option. If you are struggling to pay your monthly mortgage, visit us at: http://www.candacapital.com/Loan_20_Modification_20_Services.html Starting tonight you can sleep soundly again.
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