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Stuck in a Negative Amortization Loan? How to Convert to a Fixed Rate Mortgage |
By Paul Chavez
 Foreclosure rates are still on the rise, leading some lenders to fail, and leaving millions of Americans without a home of their own. Fannie Mae along with Freddie Mac had reached to such point that they badly needed a "bail-out"from the government.
It's getting bad with yet another wave of foreclosures set to begin in 2009.
Most of these will be borrowers in the Pay Option Arm plan. This is the Negative Amortization loan that was very popular the last 5 years. It is likely that Congress will outlaw the sale of these loans to unsuspecting borrowers in the coming months.
The Pay Option Arm comes with 4 payment options each month. The "minimum" Negative AM payment, interest only, 30-year (interest and principal amount)
and 15-year (principal and interest). The minimum monthly payment is negative amortization and was based on a teaser rate anywhere between 1%- 4.25%. Most borrowers obtained this loan and could only afford the minimum negative amortization monthly payment. The interest only, 30-year fixed and 15-year fixed payments are based on whatever index the loan was
based on, such as LIBOR, COFI, CODI, MTA, etc., plus the margin giving you the fully indexed rate. The fully indexed rate is usually (index + margin) Many interest rates are closer to 8% and 9% rather than the range of 7-9% listed. Most borrowers therefore paid the minimum negative amortization payment of 1% which gave them a substantially smaller payment - but increased their mortgage balance with each payment.
A lot of people aren't aware of the term "recast" and therefore may not be aware that they may be facing foreclosure because of this "recast" feature built into their Pay Option Arm loan. This is very important information.
Recasting percentages differ based on the lender. Most recast at 110%-115%. What this means to the borrower is this: If you have paid only the negative amortization minimum monthly payment for 3+ years or are getting close to it - your loan will recast sooner than you may have expected. If the loan recasts, the bare low negative amortization and the lone interest payment preferences vanish.
The borrower is left with only two payment options, the 30-year and 15-year fixed payment options at the fully indexed rate of 8% plus. Not only that, all of the negative amortization or as the lenders call it, "deferred interest" has increased your original loan balance at the same time their property values are falling in value. Result, most borrowers in Pay Option Arms find themselves upside down with no options other than to walk away or attempt a short sale.
In most cases the end result is bad credit or no money in their pockets to take care of the taxes caused by the short sale.
Depending on when your loan is set to recast - you can find this information on the "Note" with your original loan documents. It is possible that it will say "Adjustable Note", etc. The key word is note. If your loan contract states that your loan will recast at 110% of the "original" loan balance, this means on average that you can expect it to reset three years from the loan start date. If the terms on the note call for a 115% recast, then you will recast before 5 years. In either case, borrowers will not be able to refinance because they will be stuck with no or even negative equity, and they will be saddled with a payment that they cannot continue to make each month. They have no way of converting into a fixed rate mortgage, as they are stuck in the Pay Option Arm.
When given the option or selling their home or being able to renegotiate their current loan, keep the payments affordable and convert to a fixed rate mortgage - statistics indicate most borrowers would ultimately choose to keep their home.
Loan Modification is a great option to help you with this. A loan modification is when the lender modifies your current mortgage in order to work with you because of a hardship. The purpose is to help make your loan more affordable. Usually it is in the form of a rate reduction and conversion of an ARM, typically a 30 year fixed.
In the past this was only used when a borrower was delinquent and suffered a hardship such as a job loss, divorce, illness etc. Now, borrowers can obtain mortgage help from their lender for unaffordable rate adjustments on adjustable rate mortgages.
Loan Modification services should include the initial consultation, compiling the full application, the processing of the application, the underwriting of the proposal, written legal contract of the proposal, legal department's made up of brokers, attorneys, and paralegals communication for negotiation of the proposed modification, final resolution of the proposal and the final step which is executing the new contract and modifying the loan to meet your needs.
Paul Chavez ia a Real Estate Broker ,licensed in California ,that has over 10 years of experience behind him mainly dealing with out-of-court resolutions of Mortgage Foreclosures by talking to your lender for you to let you continue to live in your home while making lower payments . Get a consultation with no charge or obligation. We will use our knowledge and expertise to help save your home. With our assistance, Foreclosure doesn't have to be your only option. If your house payments are overwhelming you, visit us at: http://www.candacapital.com/Loan_20_Modification_20_Services.html Starting tonight you can sleep soundly again.
Home Foreclosure
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