Buy a House for Less than Your New Hybrid

January 18, 2007 No Comments »

As the mortgage market continues to shudder, and real estate goes cold, lenders continue to release exotic mortgage programs to further entice borrowers to purchase and refinance homes.

The latest mortgage program comes in the form of a fixed 0.25% option-arm, but at a rate lower than anything I have ever seen offered. Not the standard 1% fully amortized minimum payment, but a mere 0.25%. Yes, one-quarter of one percent is the mortgage rate. And not only is it 0.25%, it is interest-only. So a $1,000,000 loan comes with a monthly payment of $208.33. That’s less than what you’d pay for a Toyota Prius every month.

While this program may seem too good to be true, it is a negative amortization loan. And all that interest that you aren’t paying each month is piling on top of the principal at a rather alarming rate. After all, the less you pay each month, the more equity gets stripped away.

The program has a negative amortization ceiling of 135%, at which point you’ll need to start paying the interest-only mortgage payment, which is significantly higher, around 7% to 8%.

The 0.25% payment option is offered for 5 years, though it will suck out of the equity of your home at the rate of a reverse mortgage, and the real catch here is that you need equity in your home or a hefty down payment to qualify for the program.

The few mortgage lenders out there offering this program have set a max loan-to-value of 70%, so you must come to the table with 30% or more. So all those looking for 100% financing at 0.25% interest-only should continue to dream on.

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