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  #1  
Old 08-30-2004, 10:58 AM
Black Train Song Black Train Song is offline
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"Pick your payment" mortgage

Does anyone have any experience with them and what's your opinion?

My wife has me looking at one. The rate seems absurdly low and to me it reeks of disaster. If I'm reading the paperwork correctly not only CAN I end up with negative amoritization, I most likely WILL.

Also, the rate has the potential to go absurdly high.

I'm just about dead set against it but if there are any mortgage experts and/or math experts who can confirm that this is a bad loan (or that it's a good one) it would help me.

Thanks!
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  #2  
Old 08-30-2004, 11:35 AM
ScoobyTX ScoobyTX is offline
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IANAFinance Professional, but I have looked into these quite a bit after being asked about them by my sister. Her mortgage broker was trying to sell her on one for a house she is closing on today.

The mortgage in question was a 1 month ARM, with a starting rate about 1 point under the 30 year fixed. It was based on an index that is at its record low, kept there artificially by a 12 month rolling average that is built into it. Since rates are rising, and will continue to rise (in my well informed opinion), the rate will catch up to the 30 year fixed in close to no time.

The other "feature/selling point" is the "low payment," which was the option to make a payment as little as .25% of the principal- not adequate to cover the interest, so it would result in negative amortization (i.e., an increasing principal balance). The only conceivable situation I could imagine this would be good for was someone in a secure, entry level professional position whose income would be increasing- much like I was when I bought my house. It would give a person the opportunity to buy a house they couldn't quite afford now, but would certainly be able to afford in a year or two. There would be some risk of not being able to cover the payments (if the job didn't pan out, for example), but not much. My sister is not in that position. She took my advice and went with the 30yr fixed, and got locked in at a rate that is just about at its record low.
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  #3  
Old 08-30-2004, 11:56 AM
Black Train Song Black Train Song is offline
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Thanks

I just read a bunch of stuff on them by doing a google search but it's hard to find an opinion on them besides what's being pushed by mortgage brokers.

From what I gather it's smart for people who would bank the savings and then later re-apply it to the principal. If I did it, I'd save (after deducting the negative amoritization) around five thousand dollars the first year if the rate stays the same.

I know my wife and myself too well and the money would not last too long. Despite the initial savings I can see how the interest rate can easily catch up to me and bite me in the keyster.

That doesnt include the cost of re-financing, which would be close to fifteen grand. It also doesn't count the pre-payment penalty (it says there MAY be one, which must surely mean that there IS one).

Now only to get this through to wifey.
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  #4  
Old 08-30-2004, 12:07 PM
Quercus Quercus is offline
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Quote:
From what I gather it's smart for people who would bank the savings and then later re-apply it to the principal.
But -- any and financial professionals correct me if I'm wrong -- that only makes sense if your bank account pays higher interest rates than your mortgage charges (after adjusting for your marginal income tax rate, which is unlikely to make that big a difference).

With mortgage rates at 6-7% and CDs at 1-2%, it doesn't seem too smart to me.
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  #5  
Old 08-30-2004, 12:16 PM
CurtC CurtC is online now
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I had never heard of this, so I googled some. Boy, is the Internet full of spammy-type junk when you include "mortgage" in your search.

I don't really see a difference between this type of loan, and a standard negative amortization, adjustable rate loan. You could always get an N.A. loan and make higher payments on it, the P-Y-P loan just has "recommended" amounts prefigured for you.

The huge, insurmountable problem for ARMs right now is that fixed rate loans are at record low rates. The ability to lock in this rate for the long term certainly outweighs the lower payment in the short term, unless you plan to sell the house in a year or two.

Another problem that I saw is that some P-Y-P loans have prepayment penalties. Avoid that if at all possible.
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  #6  
Old 08-30-2004, 12:28 PM
Rufus Xavier Rufus Xavier is offline
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Stop googling! This site is hands down the greatest mortgage information website I have ever seen:

http://mortgage-x.com/

"Mortgage-X is an independent information service and is not affiliated with any lending institution."

Enjoy!
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  #7  
Old 08-30-2004, 04:50 PM
Yeticus Rex Yeticus Rex is offline
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BankRate.com

Personally, I avoid negative amortization like the plague. I have a 15 year fixed at 5% flat, and I pay several hundred dollars of additional principal so my loan will be paid off sooner than later. I realize I could take the money that I used for AP, and invest it to get a rate of return higher than 5%, put I seem to suck at investing other than real estate.
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  #8  
Old 08-31-2004, 11:10 AM
Black Train Song Black Train Song is offline
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Thanks everyone for the response.

Rufus , I found that site to be especially helpful. I've been tinkering around with the calculators since yesterday.
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