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.

Now is the perfect time to purchase a home while interest rates are still historically low.  I understand that mortgage talk can seem taboo to some and even more of a confusing topic than ever before.  While there are lots of fast talking, unscrupulous lenders still waiting to prey on unsuspecting borrowers, there are lots of helpful, ethical loan officers looking to help borrowers make the right decisions with their loan product choice.

Are Interest-Only Loans Really That Evil?

Today I will touch on interest only loans.  Many of my past clients who have purchased Charlotte real estate and homes in the surrounding areas opted for interest-only loans.  Why?  It was easy to calculate payments and "the lower, the better".  Real estate economist predicted "good times" and high percentages of appreciation in many major cities.  Get an interest-only loan, ride the appreciation wave, save extra money each money and if need be, refinance in a few years.  It worked for some, but not for all.  I still like interest-only loans.

I like interest-only loans because I like choice.  I like a few other loans, because I like choice.  Okay, you may say I have an advantage because I work in the real estate and mortgage field and the average borrower is confused by choice.  That may be true, but having the right loan officer who properly educates you on choice is better in my opinion than going for a one-size fits all loan that may not be the right loan for you.  It's all about shopping for the right loan officer, then the right loan.

As a grown-up I would like to have the choice of picking my own loan product.  A 30-year fixed loan may or may not work for me, but I want the choice of making the right financial decisions. That is attractive to me.

The bottom line is, property will lose value REGARDLESS of the loan product.  If your home depreciates due to market conditions, you have less skin in the game with an interst-only and more funds for emergencies that arise in a changing economy.  A lender will be less likely to foreclose on a property if you owe more because the lender will have a greater loss.  They will be more inclined to work with you with for forbearance and other payment arrangement plans.

If you woud like a free consultation and current mortgage information, inquire here and we will be in contact with you within 24 hours.

Sandra Allen is a licensed real estate broker and licensed loan officer.