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Many mortgage professionals have been chastized for over-promoting option ARM loans before the mortgage meltdown.  Mortgage brokers have been particularily scandalized over the issue and many indeed minimized the risks while playing up the positives.  Nonetheless, not all lenders and brokers were guilty of such wrecklessness.  A case in point the the following article which appeared in the February, 2007 issue of the Kazwell Newsletter.

Take Caution With
1% or 2.9 % Mortgage Ads

I have two words for you, negative amortization.  Personally, I find those words to be very scary.  I’ll explain in a minute.  You’ve probably  seen the advertisements touting “1% Interest” or “Pay only 2.9%”. They go by different names and are very popular these days.  They certainly sound attractive. .  .  “Pay as little as $643 (1%) a month on your $200,000 mortgage.”  While that is technically true, it is only part of the truth!  Even people who understand them well can find themselves in a lot of trouble.  They are neither illegal nor immoral and are fabulous for certain circumstances.  They can also be very treacherous for many borrowers.  Here’s the deal.  Let’s say you have one of these mortgages that gives you the option of paying just 1% or $643 on your $200,00 loan.  Wow, that’s great.  Your mortgage however will be charged at a higher rate, maybe 6.5% interest.  The payment due on a 6.5% interest rate on a 30 year loan is $1264.  $1264 principal & interest due  -$643  1% minimum payment =$621  differance.  This is where the term  negative amortization comes in. 

That left over $621 is added on to the principal amount of the loan.   That means you owe more than you did before you made the payment.  Not only that, but the next month’s interest is now calculated on the larger amount.  Every time you make the minimum payment the same thing happens.  The “miracle of compounding interest” may turn into your worst nightmare.  You can very quickly owe a whole lot more than you started out with.    For the right person in the right situation it can be a great loan.  However, the lure of being able to make a lesser minimum payment has gotten a lot of people into a lot of financial trouble.  If you are interested in one these loans we will be glad to help you.  As I’ve stated in the right situation for the right person this is a good loan.    We will strongly advise extreme caution.  For a free report on these type of loans, call Kazwell at 941-625-0015.