Many mortgage lenders advertise loan programs with rates in the 1 per cent range. We also offer a full variety of these type of loan programs but borrowers must realize that the 1 per cent aspect can be a little misleading. All programs that you see advertised with 1, 2 or even 3 per cent rates these days are payment option programs. These are great programs for certain borrowers but are misunderstood by many.
When you pay an interest rate that is below market average, such as with a pay option loan, you have a negative amortization loan. Basically, you are paying a much higher interest rate, but your payments are based on the low interest rate. The difference in payment is added to you loan balance each month. If you make the minimum payment every month, your balance will increase, and you could end up owing more than your home is worth.
Before you decide to enter into a negative ammortization program make sure that your mortgage broker fully explains the program to you and how it works.This type of loan is very useful to some borrowers but is not for everyone.
Exercise caution when following up on advertising that boasts a loan with a 1 percent interest rate. These loans are not for everybody and they are some of the most misunderstood loans available. There are many newer mortgage professionals who are not even fully aware of exactly how these programs work, and they are selling you on the fact that you have a fixed rate and payment of 1% for 5 years. Your minimum payment will usually go up by 7.5% each year. This means that if you have a $1,000/month minimum payment, the next year this payment would go up to $1,075. Also, most likely this minimum payment is still resulting in negative amortization. The 1 percent rate that you are being advertised and told is fixed for 5 years is actually only the basis of your minimum payment required on the loan. Your actual interest rate on the loan will be your margin (which is normally anywhere from 2% up to 4%) plus your index (which can be LIBOR, MTA, COSI, etc...). Therefore, you would actually have a much higher interest rate on your loan than 1%. These types of mortgages will allow you the most flexibility in your monthly payments and can help maximize cash flow, however they are not a good mortgage choice for every borrower. This is one reason to make sure you have an honest, experienced mortgage broker to work with, for all of your mortgage financing.
As long as your mortgage professional explains clearly how your payment works you should be fine. Most people run into trouble with this type of program when its not properly explained. There is no way your principle will go down if your payment is based on a 1% rate when your balance is being charged a higher rate.
Often times rates advertised this low are nothing more than a teaser rate. It makes for a nice sign or ad but the fine print tells you that this is an intro rate. Most convert to a normal rate in 30-90 days. Your mortgage proffesional can explain these type programs to you.
Most lenders require full documentation for this type of loan. Usally, lenders require low Debt to Income (DTI) ratio to qualify for this type of loan program. It means that for the given amount of loan the borrower needs to have high income to be approved for this type of loan programs.