Housing prices are at record highs. This has made purchasing a new home a very expensive proposition. In response to this mortgage lenders began offering products with lower monthly payments; this allowed people to qualify for larger loan amounts.

The problem with these new loans is that they come with adjustable interest rates. As long as interest rates remain low the monthly payments remain low. The problem comes when interest rates go up and there is a dramatic increase in the monthly mortgage payments. This is a problem inherent to any adjustable rate mortgages. Option mortgages take this problem and build on it in a very bad way; some call these loans the most dangerous mortgage ever.

Option adjustable mortgages are simply adjustable rate mortgages with flexible payment options. Doesn’t sound too bad right? There are four payment choices for homeowners with option mortgages. The first option is a traditional 30 year amortization schedule; by far the safest choice. The second choice utilizes a 15 year amortization schedule. The third choice is an interest only payment; paying interest only will never build equity in your home. Finally, the fourth option is a “minimum payment amount.” This minimum amount does not pay the full amount of interest due. The remaining interest due is simply added on to the mortgage principal.

This concept of “minimum payment” is where negative amortization comes from. Instead of gradually paying down your mortgage loan and paying this minimum amount, your mortgage is actually growing.

If you are a homeowner that continues to pay the minimum amount every month the lender could pull the loan and require you to refinance; your contract would specify this stipulation. If you are unable to refinance the mortgage you could lose your home. The reason for this is that your home may no longer be worth enough to cover the loan that secures it.

Option mortgages are for investors or homeowners that intend to keep the property for a short time. Paying the minimum amount is a dangerous trap many homeowners find it easy to fall into. If you are considering financing your home with an option mortgage your best bet is to reconsider and use a traditional 15 or 30 year fixed rate mortgage.

Albuquerque Mortgage Refinance

Louie Latour has twenty years of experience in the mortgage industry as a mortgage broker. He is the owner of Mortgages Refinance Advisor, a mortgage help site devoted to saving homeowners money with a free guidebook “Mortgage Refinance: What You Need to Know.”

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