Negative amortization options can add 12 to 15 percent onto a homebuyer's debt in the early years of the loan and lead to monthly payment increases of 100 percent or more after the loan resets to market rates and a fully amortizing payment schedule.
The payment shock could be far worse — more than 150 percent a month after the reset — if interest rates in the economy rise steadily during the early years of the mortgage.
If borrowers encounter income problems or property values flatten, they may face intolerably high monthly payments, defaults and major losses on forced sales or foreclosures — possibly on property then worth less than the amount owed on it.
Interest-only loans cut monthly payments for anywhere from three to 10 years by deferring principal payments. At the end of the interest-only period, the original mortgage balance on the house remains to be paid. Monthly payments can then jump substantially — by 30 percent or more — because the principal debt has to be paid over a shortened period.
So-called piggyback loans targeted by regulators allow buyers to combine a standard first mortgage equal to 80 percent of the property value with a home-equity credit line or second mortgage of 10 to 20 percent of the home value.
These loans are popular because they allow buyers to avoid paying private mortgage-insurance premiums, require little or no down payment, and often qualify borrowers of "jumbo" loans to pay lower interest rates on the primary mortgage.
Banks and mortgage companies say they already carefully select customers and avoid undue risks for these loans. In a letter to regulators March 29, the Mortgage Bankers Association said its research indicates that members restrict payment-option and interest-only loans to borrowers with higher credit scores and larger down payments.
Other lenders argue that payment-option and interest-only loans only go to relatively sophisticated people who plan to use their monthly-payment savings for investment purposes.
Nick Nickerson, a mortgage consultant with Nations Home Funding in Durham, N.C., says 100 percent of his clients "invest their savings ... and end up financially ahead."
"I insist that each client have a financial planner involved and the mortgage-payment savings are direct-deposited to their investment account," Nickerson said.
Lenders don't want borrowers to default, Nickerson says.
"Negative amortization is simply a way of taking equity out of your home slowly over time rather than all at once," he said.
Bottom line for you? If you understand all the working parts of a payment-option loan, have sterling credit, make a big down payment and are using your savings like Nickerson's clients, you probably don't need the financial regulators' intervention.
But if you don't fit these criteria, you probably do. |
