2. The Option Arm Mortgage came with a feature that let you have a choice on what payment you would like to make each month. You would get a 15 year fixed, 30 year fixed, Interest Only, and a Minimum payment. Every single month your bill would be calculated and it would tell you what you would need to pay to stay on track with what your financial goals are. If you wanted to pay it faster than make the 15 year payment. If money was tight then the minimum payment was what you needed to make and then play catch up.

3. The problem is that nobody ever played catch up with this mortgage. A many of mortgage brokers sold this Option Arm loan and made an absolute killing doing it. These loans could make a mortgage broker some crazy money on a commission because it paid double what a normal 30 year fixed interest rate mortgage does. Needless to say that there was an incentive for these loans to be pushed onto the home owners who were not educated in finances.

4. The major selling point of this mortgage was the minimum payment option and this is why so many people took this loan. As an example a home owner looking to refinance their $250k mortgage would take this loan because they were told that the interest rate they were paying was 3% even though it was actually 8%. Many mortgage brokers told potential clients that their interest rate was fixed at 3% but how this loan worked was that you were given a 3% payment. Of course this is all that the home owner hears after hearing from other mortgage companies that rates are higher. Sounds like a better deal so you took it. Your payments on a $250k mortgage at 8% are: 15 year = $2,390, 30 year = $1,834, Interest Only = $1,666, and Minimum Payment = $1,041. How the minimum payment is figured out is you take the actual interest rate of 8% – 3% = 5%. You figure out what the interest is on the payment at 5% and that’s your payment. It sounds too good to be true and it is.

5. What many mortgage brokers did not tell their clients is how this loan really worked. The Option Arm Mortgage did not have a fixed interest rate and interest rates were typically 2% higher than the normal 30 year fixed rate mortgage. The Option Arm loans typically had a huge pre-payment penalty during the first 3 years which was usually 3% of the balance if refinanced in the first year, 2% the second year, and 1% the third year. On a $250k loan with a 3% pre-payment penalty your looking at $7,500 in costs. Not good. The saddest part is that nobody was telling their clients that if they made the minimum payment the difference between that payment and the interest only payment would be rolled onto the back end of the loan. From our example of $250k that is $1,666 – $1,041 = $625. Let’s say that you make the minimum payment the first month. Next month your mortgage statement will show a balance of $250,625. I hope you can see how this number can grow very fast.

6. Many home owners took the Option Arm Mortgage because it was all that they could get approved on at the time. Many mortgage companies would qualify them based on the minimum payment and would give them the loan and then sell it after closing. The mortgage companies knew what they were doing and knew you could never afford the house after the neg am loan re-amortized. Re-amortized you say? What does that mean?

7. The Option Arm Mortgage came with a clause that let you defer up to 110%, 115%, or even 125% of the original mortgage balance before you had to start paying back the mortgage. Going back to the $250 mortgage and using the maximum 125% this means you could defer paying $62,500 in interest before you have to pay it back. Your new mortgage balance would be $312,500. Now you have a mortgage balance that is 25% higher than what you first borrowed ,i.e negative amortizing (not moving in a positive direction in paying the mortgage off). You can’t afford to make a payment higher than the minimum payment to begin with so there was never a month where you could pay even $5 more to the monthly mortgage payment. As soon as the balance gets to the maximum amount you can defer you have to start paying it back. You receive a letter in the mail from your neg am lender, probably Countrywide, Washington Mutual, or Wachovia (these 3 mortgage companies hold the most of these loans) saying your payment is going to be changing next month because you hit your 125% mortgage payment. You can’t believe this and you pass out on the floor.

8. After awaking you look at what your new payment is going to be like. The payment is now calculated at 27 years because you have been in the loan for 3 of the 30 years. You are required to make a principal and interest payment now and are you ready…I hope you are…cause its going to suck. You take the $312,500 mortgage balance, use 8% as your mortgage rate with 27 years left. Using a mortgage calculator you get a new principal and interest payment of $2,357.12. That is $2,357.12 – $1,041 = $1,316.12 higher than what you have been paying for the past 3 years. How are you ever going to be able to afford a payment that is more than double what you have been paying. The answer is there is no way.

9. After picking you jaw up from the ground and letting your hear rate slow down a little bit you get on the phone with your spouse and start thinking about options. You don’t have the money to make the mortgage payment so that does not help. Friends and family are going to throw an extra $1k at you every month for as long as you live in this house. Your only option is to try to refinance the Option Arm Mortgage. You call up your mortgage lender and tell them about the letter you received in the mail and how concerned you are. They don’t care because you did sign a document 3 years earlier saying you would pay this loan back. The customer service person forwards you to one of their loan officers who can maybe find out a new home loan for you. Since all of your information is in their computer system it does not take that long for them to bring everything up. Most loan officers dread looking at a credit report and seeing what the original balance was on your credit report and then seeing what it is now. Your credit report shows the exact date, original mortgage balance, current mortgage balance, and the exact month you may of had any mortgage lates. Many loan officers are already thinking there is nothing they can do for you now before you start telling them anything on your new mortgage application.

10. The reason no mortgage company is going to be able to refinance you out of your Option Arm Mortgage is because a lot or all of those loans have been eliminated all together. Option Arm Loans were considered sub-prime loans and nobody is doing them anymore. Even if you could qualify for a normal 30 year fixed rate mortgage at current 30 year mortgage rates around 6.5% with a payment of $2,054 on a balance of $325k your home is probably not going to appraise for what it needs to. During the refi boom, mortgage companies could do an Option Arm Mortgage at a loan to value (LTV) of 90%. If you deferred the maximum 125% you mortgage balance would be at 115% of the original value of the home. Home prices were going up everywhere at 15%-30% so in reality at that time the mortgage companies were betting your home would go up to. You would then still have 10% equity in your home to cover you in 3 years if you had to sell. Well, that just did not happen. At the end of 2007, home values across the country started plummeting at 5%-15% every month. Most homes across the United States have seen at least a 20% drop in what their homes were worth just a year ago. Some mortgage companies can do loans up to 95% as long as you are not taking cash out but in our example above you have already deferred 125% of the original loan meaning that you owe about 35% more than what the home is worth. No mortgage company is going to help you out now because if they do and you foreclose on the house then the mortgage note they hold is 30% more than what its really worth. This is bad business for an industry that is already hurting and nobody is going to refinance your Option Arm Mortgage. Your best bet is to try to get approved on a new home loan and buy a new, cheaper house before your current one goes into foreclosure.

Post from: The Top 10 Reasons

The Top 10 Reasons You Can’t Refinance Your Option Arm Mortgage

2. I don’t know what idiot or genius thought of this loan. The idiot that said lets give people the opportunity to pay less than the interest so the loan goes up in balance and you know what let’s give them the option to defer it up to 115% or even 125% of the value of the loan. The genius that said we can make a boat load of money making these loans and selling them in bundles to other financial companies. With the lower requirements to get approved on a loan it will be so easy to approve somebody on one. How can we lose.

3. For the people that don’t know what a Negative Amortization Mortgage is exactly, let me explain it as best as I can. What happens is you get 4 monthly payments when you get your bill. You get a 30 Year Fixed, 15 Year Fixed, Interest Only, and the Neg Am minimum payment. All of these payments would will give you an option of what you want to put towards your mortgage. As long as you make more than the minimum payment you do not get any mortgage lates on your credit report. The Neg Am payment is usually based on whatever you rate is minus 3%. Oh yeah, the kicker is your rate is never fixed. If you make the minimum payment the difference between that and the interest only gets put onto the balance of the loan and your loan gets bigger. Yippie, more debt. You can defer this money until it reaches usually 115% of the original mortgage and then it resets. What do you mean by resets says the weary client?  

4. Here’s an example of what the 4 payments, commonly called “Pick A Payment” would look like with a $200k loan at 7%. 30 Year Fixed – $1330. 15 Year Fixed – $1797. Interest Only – $1166. Neg Am (7%-3%=4%) = $666(That’s funny huh). What happens is you take Interest Only – Neg Am which is $1166-$666=$500 and you roll this on to the loan. So your balance the next month on your mortgage will now be $200,500 and so on and so on.

5. Getting back to this reset thing. Once you have reached the 115% value you are required to start paying back the balance. If you make larger payments through out the life of the loan you could get back with it never resetting. Who are we kidding though, the people that took this couldn’t afford to pay it anyways.

6. Going back to the $200k example. You could defer $30k of interest on the loan in a span of usually 3 years. So now you owe $230k on the house. I hope you live in a market where you could sell or at least put that $30k to good use and put in a bank account or made money investing it. So here is how your payment breaks down at the $230k. You take the $230k and calculate it over 27 years now because you had already been in it for 3 years. You are required to make principle and interest payments now. Your new monthly payment at 7% interest is……$1581.97. Imagine you were making the minimum payment of $666 and then the next month having to fork out about $900 more just to keep your house. Hello foreclosure.

7. In the example above this is assuming that the interest rate never changes. This is probably being nice but the interest rate is probably around 8.5%-9% so those payments I used are on the low side. The interest rates for the neg am loan is based of of the Libor which is a daily moving rate. So your payment every month is calculated based on what it is the day your bill is printed.

8. This is a real shocker to any home owner who thought they had a great loan with all of these options to choose from. If things got tight one month you could just make the minimum payment and catch up when you had the money. This sounds good but that is not how our society thinks. We should be thinking I need to save a years worth of expenses in a savings account in case I lose my job or something else happens. then you wouldn’t need a loan like this.

9. The absolute worst part about this loan is that it was so easy to sell. Major lenders like Countrywide, Wachovia, and Washington Mutual all sold this loan but was not apart of their main bread and butter loans that they originated. They bought these loans from mortgage brokers that made the loans and the lenders in turn paid them for the mortgage note. The broker is now off the hook because they didn’t even use their money to fund it and they got paid.

10. Here is a good example of how a typical sales call would sound like from a broker or banker pushing this loan. After battling with the client over who has the best interest rate and costs with 3 or 4 different mortgage companies the broker decides to throw the Neg Am loan in front of them to see if they like it. (They can’t win the 30 year fixed war and really nobody can. 30 year fixed rates are based off of for the most part the 10 Year Treasury Bond. You take that number that day and add 2-2.25% on top of it, that’s what your 30 year fixed rate is for the day. You might be able to save.125-.25% with your local bank or credit union but I covered mortgage rates already.) “OK client I have this loan that the interest rate is at 3%,” says the mortgage broker. ” What,” the client replies. “Yes, I have a loan that is fixed at a 3% interest rate. This is the lowest interest rate around and I know this beats the 4 other mortgage companies you have talked to am I right?,” replies the broker. “Yes, that sounds really good,” an excited soon to be client says. “Great, so what we need to do now is get my documents out to you to sign and order an appraisal.” The client thinks they are getting a 30 Year Fixed Mortgage at 3% and does not even stop to think why this loan sounds too good too be true and why this brokers interest rate is so much lower than everybody else’s. Americans only want to hear what interest rate you have to offer and not the terms with the loan and that’s why this was an easy sell. Even during the 2-3 weeks you are in process with them you still get phone calls from other mortgage companies trying to get you to go with them but you stick with your 3% and close. Little did you know that the 3% thing is partially true. Its a fixed 3% minimum payment. They did not tell you that the actual interest rate is probably 2% higher then the 30 year fixed rate that you were battling with the other mortgage comapnies with. Most brokers do not go over what the interest rate is and the terms of the loan and will try to side step any questions you have. The said part is when clients would get to the closing table the actual terms of the loan will be discussed with a notary and then you find out about a pre-payment penalty. Not to say it will happen or this is how it always goes down but it has happened. Instead of walking from the table people will close because they do not want to go through the process again and really need the money they might be asking to take out of the equity of the home. Its hard to point the finger because both sides are at fault. The borrower should have read the terms(come on who reads all 23 pages of application documents) and the broker for not being honest about how the loan actually works. I believe its the broker to blame. Its like going to the hospital and just assuming they know what they are doing and taking their word for it. You have to do that because you have no training on how to do brain surgery. The broker knows they are getting a sale and then they can move on. Stupid Negative Amortizing loans.

Post from: The Top 10 Reasons

The Top 10 Reasons The Negative Amortization Mortgage Ruined The Mortgage Industry