1. The minimum rate is not the interest rate of the loan. If a loan officer or a marketing representative tells you that your payment will be $643.28 on a loan of $200,000.00, ask them what the real monthly payment is. The interest payment is $1398.43 if the note rate is 7.5%. Every time you make a minimum payment, you would owe the bank $755.15.

2. This loan is currently referred to as a negative amortization loan. It is referred to as Option ARM loan, Pick-a-Payment, Pick-a-Pay, etc.

3. Some programs increase your monthly payment every year by 7.5% for a 5-year period. Some programs let you have a fixed payment for 5 years.

4. Today, you have the option of applying for a fixed rate. Rate options vary depending on what program you apply for. The real rate can vary every month; it can be fixed for 3, 5, 7, or 10 years. Some banks offer the option of a fixed rate for the lifetime of the loan.

5. The lender will give you the option of paying

   • The minimum payment based on a rate comprised between 1 and 4%

   • The full amount of interest on the loan

   • A full payment based on a 30-year mortgage (principal and interest).

   • A full payment based on a 15-year mortgage (principal and interest).

6. The balance of the loan increases every time you pay only the required minimum payment.

7. Some banks increase the original balance after 5 years. Some banks increase the original balance after 10 years. This is called a recast period.

8. If you stay in the loan more than 5 years for some and 10 years for others, your monthly payment will increase considerably compared to your original payment.

9. If your house is appreciating promptly enough to cover the difference that goes on the original loan balance, you are at a good position. If houses in your area are depreciating, you are to reconsider your position. You may end up with a loan balance that is higher than the value of your house.

10. If you are an investor that wants to flip a real estate property between 1 and 3 years, you may consider that option because you need to keep your cash flows going out to a minimum to be financially stable.

11. Never sign for this type of loan if you do not fully understand how it works.

12. If you can make a full payment on your loan, it is better to consider a fully amortized loan that should give you access to a better rate.

13. Be aware that every time you make a minimum payment, the difference will produce interest for the bank. For example: if the difference is $500 on the 1st month of your loan. This $500 will produce interest based on the real rate for the lifetime of the loan if you do not pay it back. Remember: “Nothing is free in America, especially investors’ money.”

14. When possible, try to apply for an Option ARM loan with a fixed rate and no prepayment penalty. I call this the loan of the century: It provides stability, flexibility and cash flow solutions.

For questions and comments, call 954-485-5590, email us at loans@melphis.com or visit www.melphis.com.

Author: Ernst Louis-Jacques, M.B.A.
Mortgage Planner/Business Consultant/
Trainer/Writer/Motivational Speaker

Summary:
This article shows in simple terms the different elements of the 1% mortgage, referred to as option arm or negative amortization loan in the mortgage industry. The author helps the average borrower understand the advantages and the disadvantages of the loan. He clearly lays out the elements necessary in the borrower's decision making process.