Your Mortgage : Disagreement on Negative Amortization Loans
QUESTION: As a mortgage broker I must disagree with your recent writings on negative amortization adjustable-rate mortgages. You said you didn’t like these loans where the borrower can wind up owing more than was borrowed if the interest rate rises faster than the borrower’s monthly payment is adjusted.
However, you failed to explain that the borrower can increase the monthly mortgage payment to pay the increased interest rate. I tell my borrowers that a negative amortization mortgage is like a home-equity loan where the borrowers take out some of their equity if they don’t want to increase their monthly payment. Don’t you agree?
ANSWER: No. Home-equity loan borrowers get the use of their money, but borrowers whose adjustable-rate mortgage results in an increased mortgage balance (negative amortization) don’t receive the use of that money that they owe. A better alternative is an ARM without negative amortization where the interest rate can’t increase faster than the monthly payment, which has a maximum annual increase of 7.5%.
Don’t Prepay Loan With Low Interest Rate
Q: Recently you advised several homeowners to increase their monthly mortgage payments by $100 or $200 to rapidly pay off their loans. You said these extra payments are really investments at the interest rate of their mortgages. I agree. However, I have an 8.5% interest-rate loan with about a $65,000 balance. Do you think I should make extra principal payments on this loan?
A: No. You have a very attractive home loan and I would not rush to pay it off rapidly. Yes, you can save thousands of interest dollars by adding extra principal payments each month to your regular mortgage payment. However, what you really would be doing is investing at 8.5% interest and that is not a very good investment.
Reverse Mortgages Not All the Same
Q: Some time ago you recommended a good place to find national lenders of reverse mortgages is Modern Maturity magazine. I agree. The local library had a copy and a contact for all the advertising lenders. However, each plan seems to be different.
It is so confusing to a person like me, age 72, in good health, who wants to keep her home, but who needs extra monthly income. My kids think I should sell my home, since it is free and clear, so I would net over $200,000. But a reverse mortgage would easily give me the $1,000 or so per month extra income which I need. Can you give any guidance on the maze of reverse mortgages?
A: Watch out for the so-called lenders who want to acquire your home now and give you a fixed income for the rest of your life. If the home appreciates in market value they benefit, but you don’t, since all you have is a life estate.
Don’t hesitate to seek advice from trusted advisers, such as your family, attorney, banker or other person who knows how to evaluate business decisions. Above all, don’t be in a hurry or allow yourself to be pressured into making a decision.
Questions and comments may be sent to the Real Estate Editor, Los Angeles Times, Times Mirror Square, Los Angeles 90053.