I recently saw an advertisement for the Quicken Loans “Secure Advantage loan,” so I thought I’d do a review to determine if this is a good deal or just another marketing gimmick.
You’re Getting a Neg-Am
First and foremost, the Quicken Secure Advantage Loan is a negative amortization loan, also known as a “neg-am” or option-arm loan, which allows borrowers to defer interest by paying less than the actual interest rate.
It’s important to note that negative amortization loans are out of fashion, as evidenced by the release of loan programs like the Ditech Sleep EZ loan, which highlights the lack of negative amortization as a loan program benefit.
Now back to the Quicken Secure Advantage Loan. Like other option arms, the loan program consists of four mortgage payment options, including a minimum payment (negative amortization), an interest-only payment, a 30-year fixed mortgage payment, and a 15-year payment.
Each month, homeowners can choose the type of mortgage payment they’d like to make until certain options are no longer available, like the neg-am option and eventually the interest-only option.
Here Comes Trouble
This payment flexibility can get borrowers into trouble, especially once the minimum payment option disappears when the loan reaches the maximum LTV limit of 115% (110% in New York) or after 5 to 7 years, whichever comes first.
At that time, the minimum payment option falls off, and the interest-only payment option becomes the new minimum payment because no additional interest can be deferred.
Remember, the interest-only payment is required to repay all the required interest each month, and every time you make a minimum payment, you are simply deferring interest. Nothing in the way of mortgage principal is being paid, which means your loan balance doesn’t get any smaller.
And the interest-only option is only available for the first 10 years, at which point the loan becomes a fully-amortizing six-month adjustable rate mortgage based on a twenty-year amortization, with only two payment options available, the 30-year payment and the 15-year payment.
My guess is most homeowners won’t be making the 15-year mortgage payment, and even the 30-year payment could be brutal.
The change in monthly payment can be quite substantial, possibly even double the minimum payment, mainly because the minimum payment on the Secure Advantage Loan is based on your mortgage rate minus 3%.
Though the Secure Advantage offers payment flexibility, making the minimum payment each month will lead to an excess amount of interest, which will be added to the existing loan balance, making future payments much larger.
Combine a larger loan amount with a higher interest rate and a shorter amortization period and you’ve got a recipe for potential payment trouble. Oh, and did I mention the interest rate is adjustable? Whew!
In short, the less you pay now, the more you will pay later. Don’t be fooled into thinking you can make lower mortgage payments early on and not make up for them at some point down the road.
Sooner or later, you’ll need to pay, sell, or refinance your mortgage to avoid dealing with an exploding ARM.
Read more: Quicken Loans Rocket Mortgage review.