Negative Amortization Loans and Their Risks

By: Igor Buces
Submitted: 2007-01-17 16:16:07
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The MTA (monthly treasure average) loans have become a very common type of loan in the mortgage industry. It has become very popular because it provides people the chance to afford a more expensive house. At the same time, it gives the home owner the flexibility to choose among four payment options every month.

In this article, we’ll take a look at what this type of loan is all about, AND the main risks associated with it. The MTA loans are based on the monthly treasuries average index; one of the most stable indexes in the market. By using this index, your payments won’t change much during the first five years. Payment rates usually range from 1% to 2.95% for the MTA ARMS.

Please keep in mind that since the rates are so low, your monthly payment may not cover the interest charges causing the loan to create deferred interests (also called negative amortization.)

All MTA mortgage loans have a 5 year payment recast. A payment recast is a recalculation that is performed to figure out the payment necessary to repay the loan over the remaining 25 years. This is done by adding any deferred interest to the remaining loan balance and amortizing the payment over the remaining 25 years.

For example, A MTA loan of $400,000. After 5 years there has been $30,000 in deferred interest, your new loan will be $430,000 at the then current rate, amortized over the remaining 25 years. So, if your payment started at 1% or $1,286, in year one and rates were at 6.75% or higher, after year five, your new payment would be $2,970, or higher.

When you choose an MTA loan, you have four choices for your monthly payments each and every month:

1. Minimum payment option – The minimum payment accepted by the bank. Most of the time, it will cause deferred interests to be accumulated.

2. Interest only payment option – With this option, you only pay interests and you don’t reduce the balance of the loan.

3. Full principle and interest – The same payment you would pay in a 30 year fully amortized loan.

4. 15 year amortization payment option – This is the highest of all payments but it’s the one that reduces the balance of the loan the fastest.

Keep in mind that the MTA loan has several drawbacks:

1. It’s an adjustable rate loan – No matter which one of the MTA’s available you choose, these loans still have an adjustable rate. If you plan to live in your house for the next 30 years, you may be better off with a 30 year fixed mortgage.

2. MTAs usually require a minimum of a 5% - If you require 100% financing and wish for a low payment, you should consider 1, 3, 5 year interest only ARMS.

3. If you are tight with money, you may have to refinance the loan every five years (just before the loan is recasted and the monthly payments jump up.)

4. Also, if you choose this type of loan to afford a more expensive house, you may be in trouble when the payment goes up.

Please, take some time before deciding on choosing this type of loan. The most important advice I could give you is to talk to a certified mortgage broker who can study your financial situation and goals, and choose a mortgage that is suited to your needs.

In the next article, we’ll take a look at how you can use MTA’s in creative ways to fund your retirement, your children’s education or the purchase of additional assets.

Igor Buces is a certified mortgage broker in South Florida. For more information, please visit http://www.miamimortgagehome.com

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