Charlotte Real Estate, Foreclosures, Short Sales

The Pick-A-Pay Loan. The Good, Bad and Ugly

Pick-a-payment loans can be high risk for some home buyers and a great way to manage cash flow for others. Pick-a-pay loans can potentially become negative amortization loans. Another name for these type loans are "Option Arms".
A Pick-a-Payment loan is designed to give the homeowner control over their mortgage payment. It consists of 4 different ways to make your payment:
Minimum Payment
Interest Only - The homeowner can defer making payment on the principal of the loan.
Full Amortization - Principal and interest payment based on a 15 or 30-year payment schedule.
15 Year Payment Option

Important questions to ask the lender include:

1. How long is the initial start rate fixed for?
2. What type of Index is used for the initial rate?
COFI - Cost of Funds Index. The index represents a weighted average cost of funds and includes long-term accounts.
Because it is an average, it doesn't move very fast. This protects the interest rate of a COFI loan from fluctuating
quickly.

CODI - Certificate of Deposit Index - A CODI loan is based on one of the most stable indexes currently available. It is
the aggregate sum of what banks are paying to their depositors on their 3-month CD accounts
MTA - Monthly Treasury Index. The MTA is relatively slow moving index based on the 12 month average of the
monthly average yields on U.S.Treasury Securities adjusted to a constant maturity of one year.

3. What is the margin?  Margin Plus Index Equals Fully Indexed Rate.

4. Is there a pre-payment penalty?

The flexibility of this type of loan can often get people into trouble.  Negative amortization can occur when a lot of minimum payments are paid and the loan amount increases.  Some studies have suggested that more than half of option ARMs borrowers are making only the minimum payments, says Glenn Costello, managing director for Fitch Ratings, a debt-rating agency.

In markets of declining home values and with the commission charged to sell your home, a homeowner can be forced to bring money to the closing table to sell a home with an Option Arm.   It can also be a precursor to foreclosure for homeowners unable to handle rising indexes associated with the mortgage

Wachovia's Fixed Payment Option

Wachovia Mortgage and World Savings have teamed up to offer a fixed payment option.  You can enjoy the flexibility of choosing a different payment each month while also having the option to enjoy the predictability of a fixed mortgage.  The homeowner needs to fully understand the repercussions of alternating between the different types of payments and how it will ultimately affect your bottom line.