Are there really interest rates of 1.25 percent? Neg am mortgages figure out more than one mortgage rate. The payment rate is one, and the interest rate is the other. The payment rate is capped at 7.5% of the last payment, which is good news. The true interest rate is just the index plus the margin, with no caps on how often it can go up or down. With a negative amortisation adjustable rate mortgage (ARM), the mortgage payment doesn't change even if the interest rate goes up. Instead, the extra interest cost is added to the balance of the loan.
Negative amortisation loans let homeowners choose which rate to pay, which is why they are also called "payment option" loans and option adjustable rate mortgages (ARMs). Alt-A negative amortisation loans include the Cost of Funds Index (COFI), the Cost of Savings Index (COSI), and the Monthly Treasury Average (MTA or MAT). The share of alt-A loans went from 8% to 11%, according to the Mortgage Bankers Association of America (MBA). Why? Because these loans are flexible and affordable, you can use them to buy a home or refinance your mortgage to get cash from your home's equity.
The interest-only loan is another type of loan that is affordable. In a fixed-term interest-only loan, you only pay the interest on the mortgage each month. After that period, which is usually five to seven years, you have to refinance, pay the balance in one lump sum, or start paying off the principal, which makes your monthly payments a lot higher. Like negative-amortization loans, interest-only loans are option adjustable-rate mortgages (ARMs) because the borrower can choose to pay only the interest or both the interest and the principal.
Negative amortisation and interest-only loans can be helpful if getting cash flow is more important to you than building equity. If you only pay the payment rate, your monthly mortgage payment may be less than a typical amortisation loan with a 30-year term. If you're a short-term borrower who plans to refinance or sell the home within a few years, or if you have unstable sources of income or too little documented income to qualify for a traditional loan, you might want to look into a neg am loan or an interest-only home loan.
