As the real estate prices in the U.S. have increased significantly over the past 10 years, many potential homebuyers are searching for means to afford the purchase of a home they desire. Little or no money down is readily available; therefore, the down payment is not the problem. Making sure the monthly payment is affordable or at least manageable is a large concern for many homebuyers. Unfortunately, this concern has led more and more consumers to consider one of the most dangerous types of mortgages in the history of lending.
Advertisements by mortgage companies that boast interest as low as 1% are referring to negative amortization loans, a.k.a. option ARMs. This mortgage gives you the option of making three different types of payment each month. You can pay a minimum payment, an interest only payment, or a principal and interest payment. As you can imagine, the interest rate lenders advertise is the minimum payment. What's the catch? Consider the fact that if you only pay the minimum payment, your loan balance will increase, not decrease, over time. OUCH! That's right, if you start off with a loan of $200,000, you could owe significantly more than $200,000 in a 10 year period. Imagine owing more on your mortgage than what your home is worth.
So who in their right mind would consider this type of mortgage? Surprisingly, this loan is advantageous for a small population of consumers. For example, an entrepreneur that has a seasonal business and would like the option to control his/her cash flow based on their changing income may find this loan optimal. Also, individuals that receive over 25% of their income in commission or bonus income may find this loan optimal as long as they are disciplined enough to apply additional principal payments when feasible to eliminate negative amortization.
For the majority of borrowers, this loan is not worth the risk associated with its terms. Many economists feel that most of the housing market will see little if any appreciation in the near future. Further, in some housing markets located on both the east coast (i.e. New York City) and the west coast (i.e. San Francisco) there is a high probability of depreciation making these types of loans even less attractive. If you must consider a lower payment than a normal, principal reducing mortgage (fully amortizing), then consider an interest-only loan. If you only make the minimum payment on an interest only loan you will not reduce the balance, however, you will not risk increasing your balance either.
As the real estate boom slows down, it is imperative to adjust quickly and return to the traditional means of financing. The current market is suited best for a traditional 30 year fixed and a reduction of financing risk. Real estate continues to be a great long term investment. However, none of us would like for our American dream to become a nightmare.
About JFG Mortgage
JFG Mortgage Corporation, is a premier, independent finance company that facilitates financial solutions. As a licensed mortgage broker, JFG's extensive financial expertise sets them apart from other mortgage brokers and providers. JFG leverages its status as an owner-operated boutique to provide clients with the personalized attention that they deserve. At JFG, consultants typically attend the closing. They also guarantee 24-hour response to all inquiries, a two-day approval process and consistently deliver quick closings.
JFG Mortgage Corporation has particular experience in securing Jumbo, Commercial, and difficult to finance loans.
