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ad5000 | I found a home loan with a teaser rate of 1% locked in for 5 years. Is there something I should be wary of? |
I'm planning on selling my home in about 5 years anyways. Is there some other catch with this kind of loan that I should be wary of? |
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daveowenville
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Above comment about balloon payment is a good one; personally had a mortgage that seemed too good to be true, until we were signing the huge pile of papers and found one that mentioned the balloon payment -- under the terms, after 15 years, we would have paid down almost none of the original loan!
There are conditions under which this isn't necessarily a bad deal, but it involves a lot of financial discipline, and your mortgage lender probably won't help you figure it out.
A bigger concern at this point is simply this: interest rates are going up, and the housing market is slowing down. You may get a mortgage you can afford for five years, but can you afford it if the rate adjusts to, say, 10% in five years and you can't find a buyer for your house who will pay what you still owe?
Finally, how much are you paying in points/fees on that loan -- and is it more overall than you'd pay on interest for, say, a fixed 30-yr loan at a reasonable interest rate with no points/fees? |
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Thomas F
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Yep. Look for the loan covenants, or terms and conditions. For instance you might see the following:
Negative amortization - where you're paying 1% but accruing 7% added to princpal (putting you upside-down)
No rate cap - where you're at 1% today but in 2011 you're at 21%
Minimum term - Minimum occupancy clause with one of the following: Liquidated damages, or early termination charges
You're right to be wary - if you go forward with this, read the fine print carefully and consult an attorney if you have any questions. If the lender balks at this, that's a bad sign. Good luck. |
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mtgguy
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yes, because you will go into negative amortization if you only pay the min. balance. This means if you borrow 200k, after 5 years you can owe 250k. The product you are looking at is prob. called a MTA loan |
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Tiffany S
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Absolutely! The rate today for a 30 year fixed loan is about 6.7%. If you are being offered a "teaser" rate, it is probably being offered to you as an Option ARM. This type of loan usually gives you four payment options to choose from: a negative amortization payment (what the 1% option is based on), an interest only payment, a 30 year fully amortized payment and a 15 year fully amortized payment.
If you make the payment based on the 1% rate, you will be negatively amortizing your loan, i.e. the difference between what you would be paying to cover the actual interest owed on the loan and the 1% teaser, is added to your principal loan balance.
So, instead of paying down the principal, or at least covering all the interest owed on the loan, you will end up owing more than you initially borrowed.
It's great to have a rate--and payments-- that low. But in today's rate climate, with rates seemingly moving up every week, it doesn't make sense to not at least lock in a rate for at least the five years you are planning on staying in the house. Also, home prices are not expected to increase at the rate we've seen over the last couple of years, so if you're adding to your pricipal loan balance by paying the neg am payment, you may find you owe more on your house than it's worth when you go to sell in a few years.
Bottom line: bite the bullet and look for a loan that requires you to at least pay the interest-only payment, and if you can swing it, a fully amortized payment!
Tiffany
CA Licensed Mortgage Broker |
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MrNiceGuy
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AIDS |
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B
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balloon payments are a common ploy |
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mbrownusa
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You may want to check that out, it could (more than likely) be a Option Arm. If you continuously pay the 1%, the loan will put you into debt instead of paying it off. You will have 3 or so choices when it comes to making a payment. The minimum payment, interest only payment(of the start rate)or a 30 year payment. Check with your loan officer what your starting rate will be (it should be around 7.5 to 8%). If it is the option arm here is a website for you.
http://mortgage-x.com/library/option_arm.asp |
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vegasb2k
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The 1% is only the interest rate for the 1st month. Then the 1% refers to your payment rate. The actual interest rate will be much higher, although your payment will be the same.
It is a risky loan to some, but if you are smart with your money it is actually a great loan.
Just remember that if you pay the minimum payment each month, the principle balance that you owe on the property will be going up each month so you will owe more than you borrowed at the beginning.
If you make good use of the money that you save each month on your payment, you should be able to offset most of that additional balance. |
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Mudisfun
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There are a few companies offering this product. It is an option arm but it is somewhat different in that your rates are locked for the first 5 years.
With your normal option arm you have a 1% minimum rate payment, an interest only payment and a 30 or 15 year payment. The only item which does not change monthly is the 1%; all of the other payments adjust monthly based on the idex it is tied to.
With the 5 year fixed most of these are being tied to the 5/6 Libor index but nothing changes for 5 years! We have been selling a ton of these since it still allows the client all of the advantages of an option arm but with the security of a fixed rate for 5 years.
Here the real deal. When you make the minimum payment you are not covering the interest accumulated during the month. Lets say you pay $1000 but the interest only payment is $1500. Thats a difference of $500. Where does this go? It gets re-added to your existing loan balance. In effect you are borrowing from your existing equity. This is not a bad thing if your looking to sell in 5 years it just means that you pay off will be higher and you will pocket less funds at closing since you will have been 'borrowing' from those funds for the past 5 years.
You really need to understand this product and your Loan Officer needs to throughly explain it to you. If you are uncomfortable or do not understand what is happening than this may not be the loan product for you. I talk more people out of this product just because I explain the good and the bad. Also, most of these come with a 3 year hard pre-payment penalty. This means that if you refinance or sell within the 3 years you MUST pay the penalty.
If you need additional information drop me a line.
Kevin 866-562-6838 x 106
kruorock@firstratelending.com |
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Mrsdonmar
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That sounds way too good to be on the up and up. I would check out the company before signing anything. There probably is a catch there for sure. |
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Granny 1
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Sounds like it will have a balloon payment at the end of five yrs. You should check this out very carefully,and I would ask a lawyer to look this over. |
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Alvin T
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That is a great deal! Reason I say that is because if you are positive that you will be selling your home in 5 years or less, it won't matter what the interest rate is after.
The only thing you you should wary of is if there is a pre-payment penalty. If so, how much and how important to you is it to pay it or not?
Other than that, you will have your typical closing costs that may be a bit higher than most lenders, in order to compensate for the low rate.
Hope that helps some. |
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