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Debbie Siegel's Mortgage Minute
A Mortgage with a Rate of Three Percent?
Does such a thing really exist? Yes, but buyer beware on this one.
This low rate is in fact possible, with a product known as an "Option ARM"
(sometimes called a "Cash Flow ARM"). Keep in mind however, that what is
being advertised is the payment rate, not the interest rate.
On most traditional fixed rate mortgages, you pay the same amount of money
each month. With these Option ARMs on the other hand, each month you
receive a statement with up to four different payment options to choose
from. It is up to you to decide which payment to make.
- The first option is to make the minimum payment. This option is the
lowest of all four payments, however you end up creating a negative
amortization, meaning your original loan balance will actually increase
rather than decrease.
- The second option is interest only. In this case, you pay only the
interest due. So while your original loan balance doesn't go up, it
doesn't go down either.
* Next 37 17 investors only!
- The third option is a "traditional" 30-year mortgage payment. It's the
monthly equivalent of both principal and interest, amortized over 30
years.
- The fourth option on an ARM like this would be a 15-year amortization.
Here, you pay a monthly number that assumes the loan will be paid off in
15 years rather than 30.
It is important to understand the difference between what you are required
to pay (like the minimum amount due on a credit card) and what you really
should pay each month in order to make progress at paying off your
mortgage.
Keep in mind, simply making the minimum payment each month for example,
while allowable under this arrangement, may hurt your financial position
over time if home values stay steady or fall.
With these types of loans, the "real" interest rate (sometimes called the
fully indexed rate) is calculated by the index (like the LIBOR, COFI or
MTA) plus a fixed margin.
As with all investments therefore, and to ensure you derive maximum
benefit without compromising your long-term financial goals, make sure you
consult with a financial planner or accountant when thinking about
committing to an Option ARM mortgage.
Got questions about real estate financing? Contact
Debbie@westchester-mortgage.com
or 617-965-1236. She'll consider them for
inclusion in a future column. Debbie Siegel is president of Westchester
Mortgage in Newton, Mass. She is licensed in several Northeastern states.
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