Difficulties Doing a Home Equity Loan Behind a Negative Amortization Mortgage (Payment Option Loans)
By Rebecca O'Connor

If you are considering a home equity loan to refinance debt and currently have a negative amortization loan as your first mortgage, you may find the negative amortization loans can hold you hostage. It can be very difficult to get a second mortgage behind negative amortization loans. In fact, very few home equity lenders will go behind a negative amortization first. It's just too risky.

Home equity lending underwriters calculate the 1st mortgage balance by gross up balance, 115 percent or 125 percent depending on the mortgage note. With this in mind, a 100% home equity loan behind a negative amortization 1st mortgage that has been losing equity is a dangerous situation. Depending on your credit score, you may need to refinance your negative amortization 1st and then get a new home equity loan. In fact, even if you can't get an equity loan yet, you may want to refinance anyway.

According to Countrywide Home Loans, 75% of their payment option borrowers choose the one with the cheapest mortgage payment, the negative-amortization option and are worried enough that they recently sent out a letter to each of these borrowers. Angelo Mozilo, Countrywide's chairman and chief executive hopes that the borrowers that are about to get into financial difficulties will refinance.

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