Second Mortgages Behind Pay Option ARM Neg-Am Loans
Nationwide offers 2nd mortgages and home equity loans behind payment option first mortgages that have a negative amortization or interest only. Call 1-877-212-9478 for more details from a loan officer. We are one of the few mortgage brokers in the country who offer second mortgage loans for borrowers who wish to keep their negative amortized 1st mortgage intact.
By Nick Rian
Time may be running out for thousands of homeowners in Southern California. A few years ago when housing prices shot through the roof an estimated 50% to 70% percent of all home purchases used hybrid loans such as negative amortization and interest only loans.
"Now we're starting to see declining Marketplaces and the condo market in San Diego County is dropping," says banking executive Dan Ambrose. "Feasibly home owners could have no equity anymore.and now they owe more than the house is worth."
Also known as a Neg-Am loans, the principal balance increases every month, eating away any equity built in to the home. Many people who refinanced. If property values decrease at the same time, homeowners could face an unaffordable mortgage payment and no equity to cash out.
Here's why... A Negative Amortization loan allows a home owner four payment options. One of which is a minimum payment similar to a credit card. The monthly payment doesn't even cover the interest of the loan and the remaining balance is added to the principal. The loan balance actually increases with time. And the bank puts a cap on how much the principal goes up until the loan converts to a traditional amortized payment.
"People get sold on the idea of the loan low payment, says lender Brendon Daly. "A person gets carried away thinking the payment is ok to make every month."
They've already got the cheapest payment they could already get, says Daly." The only reason to get the loan is to cash out everything." Homeowners actually have a couple of options all involving a second mortgage behind their negative amortization first loan:
- Pull the home equity and sell the home
- Use the equity to pay-off their other debt and increase their credit score
- Pay down the balance cap to extend their stay
- Make home improvements and try to increase the value of their home against a sliding marketplace.
"We're going to protect ourselves and look at the worst cast scenario all around and make sure you can really afford it."
Ambrose is talking about mortgage lenders "grossing up". Basically that means, the bank will forecast how much the balance will increase. Banks will usually add 115% to 125% to the existing balance before approving a second mortgage. For example, if the negative amortization cap is $100,000 and the cap balance is already at $40,000, banks will consider the loan balance at $46,000 or $50,000, before approval to make certain the consumer will be able to afford the loan.
And, finding a lender to approve a second mortgage behind a Neg-Am loan isn't as easy as in the past. HSBC, a mortgage lender, at one time approved second mortgages based only on stated income and the current cap balance. The bank approved loans all the way up to 95% or 100% CLTV, or Combined Loan to Value.
Ambrose say HSBC has since pulled their product off the market. "They are predicting what s going to happen.now its no longer a viable gamble.its too high risk." "I think you couldn't put a second mortgage behind the negative amortization 1st mortgage.people are so used to making that minimum payment if it ever did adjust all these people are going to be pissed.there's no way they're going to be able the afford the house payment."
But home equity lenders will approve a second mortgage behind Neg-Am is there's good credit and true income. And Ambrose thinks the best way to get approved is to use the equity for home improvements and increase the value of the home.
For homeowners with less than perfect credit, an option is to cash out their equity completely and use the equity for a down payment on an interest only loan.