Negative Amortization Loan
by Tim from Beach Park, Illinois USA
Ask Kate about refinancing a negative amortization loan: Hi Kate, I bought my house at the wrong time, obviously. I decided to get a Pay Option Arm, thinking that real estate prices were going to go up. In April 2007, I purchased the REO (Real Estate Owned By The Bank) and paid $285K, and put down $52K. So my LTV (loan to value ratio) was at 80 percent.
My mortgage balance is now $248K, and my home is worth about $220K or so. I had it appraised in January and it was worth $235K. My mortgage isn't eligible for HAMP or any government relief, according to the bank who owns it.
Note from Kate: Home Affordable Refinance Program (HARP) gives homeowners the opportunity to refinance into more affordable monthly payments. Home Affordable Modification Program (HAMP) provides eligible homeowners the opportunity to modify their mortgages to make them affordable.)
1. My credit is very important to me, and I am not interested in skipping payments or doing a mortgage modification.
2. I don't have the additional money (at this point) to pay down about $50K and get into a position where I can refinance.
3. My Pay Option Arm resets in April 2012.
Do you have any suggestions for me on how to proceed? I have a performing loan, and I can afford a 30 year fixed payment.
I have not yet approached my mortgage lender about a refi because I want to make sure I know what options I have before I go back to them. I would think that they would want to refi a performing loan, because the alternative is that I will walk away.
Yet I do not want to walk away because as I mentioned, my credit is very important to me. My credit scores are in the mid 700's.
Kate Answers: Trying to Refinance a Negative Amortization Loan
Dear Tim, The number of creative refinancing solutions plummeted with real estate values soon after you purchased your home.
Since the Pay Option Arm Mortgage is not generally a Fannie Mae or Freddie Mac loan, I assume that is why your lender said you are not eligible for HARP.
HARP and HAMP - Choose a Lender
Homeowners up until fairly recently, were forced to return to their loan servicer for HARP refinances. Because myths surrounding HARP and HAMP abound, it was difficult to get a straight answer. HARP no longer has this restriction.
So if you ever want to double check your personal qualifications to refinance via HARP, you have your choice of lenders to call.
Negative Amortization Loan
Because you have a Pay Option Arm Mortgage, there are several payment options. One of these options is to pay less than the interest due that month. This option increases your mortgage balance and is the reason your mortgage is called a Negative Amortization Loan.
Depending on the quality of your Option Arm loan terms, your interest rate could be relatively low right now. And hopefully mortgage rates have a few more years to stay low which could take the bite out of your adjustment in 2012.
Create Your Best Fixed Rate Mortgage
So I suggest, as long as your intention is to hang onto your house long term, accelerating your mortgage pay-off makes sense. I have a method for this. Although the idea isn't new, I saved a lot of my mortgage customers from unnecessary refinances with it. And eventually it could put you on the path to gaining equity.
Read about it here at Best Fixed Rate Mortgage
. Wherever you read "40 year mortgage", substitute "Pay Option ARM Mortgage".
15 Year Fixed Rate Mortgage
Another choice is to use my mortgage rate calculator
to figure the monthly amount needed to pay off your loan in 15 more years. It should be in the ball park of $2000 plus taxes and insurance. Read more about 15 year fixed rate mortgages
and longer terms here.
More homeowner questions and my answers on Loan Modification, HARP and HAMP, Strategic Default, and Real Estate Short Sale
are found here.
Best wishes an affordable mortgage,
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