1% Mortgage Loan - part 2
by Ben Afzal
Here is the first catch: when you make the minimum payment, any amount short of the interest-only payment is added onto the principal of the loan. For example, if:
the minimum payment is $1,200 per month interest only payment is $1,500 per month you are increasing the size of your loan by $300 if you only pay the $1,200 minimum payment ($1,500 less $1,200). An increase in your loan size is known as "negative amortization".
If you continue to make minimum payments over time, your loan balance will continue to increase.
The level of your minimum payment can also be reset, typically on an annual basis. The minimum payment is usually fixed for 12 month periods at a time. Once a year, the minimum payment typically increases slightly. For example, the minimum payment each month for the first year may be $1,200, then the second year it may be $1,300, the third year it may rise to $1,400, etc. This increase is usually predefined in the loan.
Minimum payment levels usually last for the first 5 years of a loan, after which the loan reverts back to a regular adjustable loan. You can't make minimum payments forever. Some loans come with a conversion option to change into a fixed rate loan at some period. Some people refinance around year 3 to get back to the lower minimum payment levels.
There can also be a reset to a regular loan if the loan size increases too much relative to the value of the property. This means that making minimum payments is no longer an option.
Interest Rate on 1% Option Loans
What is the interest rate on this type of loan? Usually it adjusts on a monthly basis and is the sum of an interest rate index plus the "margin" which is the bank's profits. The interest rate index can be based on different published indexes, such as the LIBOR, COSI, or CODI index. Some of these indexes change value faster than others. These loans also usually come with a lifetime cap on the interest rate, so the upside rate risk is clearly defined.
Is The 1% Loan Right For You?
If your loan continues to increase, and the value of your property drops, then you can end up owing more on the property than the house is worth. This loan is not for everyone.
If you have lots of equity in your property and don't mind you loan size going up, you may consider this loan. Often people have found that gains in property values are higher than the increase in their loan size. For example, a customer may start the year with a loan of $300,000 on a $400,000 property and may end the year with a $310,000 loan on a $450,000 property. The borrower's equity in the home has still increased, despite the increase in loan amount.
The 1% loan often only goes up to the first 80% of the value of the property, after which if an additional loan is necessary it is usually an equity line at a higher rate.
For rental properties, a minimum payment may allow you to collect enough rent to make a monthly profit or be closer to it. The minimum start rate is usually higher than 1%. It can often be 2% or higher on rental properties. It can still be helpful.
For some people a minimum payment may be the option they choose once in a while. Some months they pay more, some months they pay less.
For some borrowers the minimum payment may be an attractive option because it allows them to put the minimum cash into a property while riding up its value (this is the concept of leverage).
The risk of owing more on your property than it is worth is something to seriously consider.
For more information visit www.archerpacific.com Loan Library
Related Mortgage Loan Articles: Mortgage Loan Calculators Show You How Long And How Much You Pay On A Loan 4 Tips About No Documentation Mortgage Loans The Secret To Finding The Best Mortgage Loan How Do You Find The Best Home Mortgage Loan? Overview On Mortgage Loan |
Related Mortgage Loan News: |
Back from Mortgage Loan Articles
to California Morgage Articles Directory