Mz. Add me asked:
IN A WAY THAT AN IDIOT CAN UNDERSTAND.
IN A WAY THAT AN IDIOT CAN UNDERSTAND.
I am not a very smart peron and can you thoroughly describe these loans?
I am considering flipping a house.
http://1mortgagecalculator.info
Negative Amortization: you borrow more money for some fixed time before beginning to repay your loan.
Interest only: you don’t start to repay your loan and pay only interest for some fixed time.
My brother borrowed money on a neg am several years ago. He started off with about a $100,000 balance and after a few years his balance was $115,000. He was making payments, but they didn’t really even cover all of his interest costs so they just added the amount he wasn’t paying to his mortgage balance. His was also an adjustable rate loan- that meant that the interest rate might change from time to time (and they often give you an artificially low rate at first so that first adjustment will be a killer).
The interest only loan is just that. You are paying only the interest. On a fully amortizing loan in the first few years you pay 100 or 200 a month toward the principle and it slowly chips away and over 15 to 30 years you will gradually pay it off. On a interest only loan you make only the interest so your payment is 100 to 200 lower. Then after about five years they require you to refinance (because they want their principle back). If the interest only loan is still available at that time you could get another one of those, or you could sell your house and pay it off that way.
A negative amortization loan works like this. This is a common feature in an optional arm loan. You will have four options to pay every month. A minimum 1.75%, Interest only, a 15 year adjustable and 30 Year Adjustable. As an example let’s say you took out a 100k mortgage with the following rates and monthly payment:
Minimum Rate 1.75% = $145.83
Interest Only Rate 6.5%= $541.67
If you elect to pay the minimum payment the difference between the two will be added to the balance monthly (395.84). Your minimum payment will stay the same for a year and increase a certain percentage every year till you reach 110%-125% of market value and then you will have to refinance or start paying down the balance. Most of these loans come with a 1-3% prepayment penalty. As the years go by the penalty will decease. If you are doing a flip then you should factor in the pre-payment penalty in you holding costs.
Also, take into account that your interest only payment will increase every month because your overall balance has increased. The next month payments will based upon 100,395.48.
An interest only loan is where you are paying just interest and your balance will not grow nor decrease. This loan is optimum if you plan on staying short term and values in your neighborhood are increasing.