1% interest only mortgage / loan?

Can anyone explain to me what the 1% refers to in all these ads for mortgages/refinancing? We just got a quote from a broker for a refinance at 1.5% but the "Truth in Lending" sheet shows a variable rate, which starts at 7.4%. Our loan broker isn't giving us a straight, understandable answer - help!!

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  • 1 decade ago
    Best answer

    This is most probably a MTA loan or another variable index. Let's focus on this as a MTA product, because this is most likely the loan product, and would be the best one offered.

    The following is a link to the MTA index:

    http://www.moneycafe.com/library/mta.htm

    This can be a very powerful program for better and for worse. The reason that your loan officer is probably not giving you straight answers is because he probably does not understand the mortgage. (This is further displayed by his TIL because the APR should be about 10.5%)

    Here are some calculations from my web site that should help give a little explaination to the program. I use a 40 yra term compared to a 30 year term. These are meant to be approximate numbers using a 200,000 loan amount.

    This is your actual interest rate and undeferred payment: 1,301.39

    http://www.nnnstore.com/mortgagecalculator.php?che...

    Here is your payment at 1.5%: 554.34

    http://www.nnnstore.com/mortgagecalculator.php?che...

    Your actual interest rate is 7.4%. The loan program allows you to pay less. Anything that you pay less than the $1301 is added to the principal balance of the loan.

    For instance, if you pay 554, 1301 - 554 = 747. 200,000 + 747 = 200,747 = principal balance of home loan in month 2 (interest will be calculated off of the new loan balance).

    The minimum payment feature is typically fixed for 5 to 10 years. The actual interest rate is variable and changes every month.

    If you look at the previous MTA link, that has your actual index/month. That index plus the loans margin = interest rate. The index is going higher, and you should expect an average loan interest rate of 7.5% - 8% over the next year or so. Any increases or decreases in the rate will mean greater deferment from your minimum payment. We are upticking, so don't expect the interest rates for the MTA to go down.

    Listen... this answer is long enough as it is. I'll get right to the nitty gritty.

    You really have to consider your goals with the program. If you are self employed, or flipping houses(buying out of the prepay) and the loan program opens up cash flow to put towards your business... it's great.

    I don't think that this is the case for you.

    For the typical person who is being pitched this mortgage for their primary home it is a very bad product. Unless you really understand the mortgage and have additional investment plans with the deferred payment, it's not worth it.

    One very nasty feature to your common borrower is there is an automatic payment RECASTING. This means that if your principal loan balance becomes 115% (eg. 230,000) of its original amount you must pay the fully indexed payment (1301/month). For most people this is projected to happen about year 4.

    Unless you are able to take the $700 payment savings and put it into a higher yielding investment of 10% or greater, I would not do this loan program. (especially, if you can afford a more traditional program at this point.)

    Source(s): Me, I'm a lender in FL and have sold many MTA. Especially when the index was in the 2's. Also, here's my real estate 1031 exchange website that I'm working on: http://www.nnnstore.com soon to be http://www.1031store.com
  • 1 decade ago

    I got this one. I am a loan officer. Your loan officer sold you and option arm. It has a start rate of 1.5%. There are also two other options like the interest only option and the principle and interest option.

    1)1.5%-This is called the START RATE. IT is NOT the interest rate. The interest rate is 7.4% which is what you are actually end up paying the lender in interest through the loan whether you pay it today or when you sell the home. If you pay this option your mortage balance will go up. (Negative Amortization). And you will actually own more than you have started with. There are some articles on CNN that show people with these types of mortages are at a higher rate of default because they have mortages owing more than their house.

    2) Interest only option is 7.4. If you pay this your balance stays the same...(also this rate is NOT fixed) and with most products varies monthly or yearly depending on the index used for the product.

    3)Principle and interest payment. Your regular payment to pay off the loan in 30 or 40 years. Again...this rate is NOT FIXED FROM THE START AND VARIES MONTH OR YEARLY DEPENDING ON THE PRODUCT.

    All these things are what you should talk with about your loan officer. I recommend these products to people that are self employeed, good with money, savvy, and know the details of the product. I don't want them calling me back pissed because they didn't know some things..

    IMHO...this guy is giving you shaft. With 7.4% rate he is making a nice premium off this loan of between 3-4% of the loan amount plus whatver he my be getting up front. DO NOT GO WITH THIS PRODUCT. If you want to learn more, read up on Option Arm to see if it is right for you before you go with this. The low 1.5% rate is a draw in for people, but for the average homeowner this product will spell disaster especially when housing market cools even more.

  • 1 decade ago

    1.5% is the minimum that you are asked to pay. Original is 7.4% rate and the difference will add to your principal.

    If you are a good planner this is a good loan. If you are not an investor then don't go for this loan. If you are qualifying for this loan, that means you have 640+ credit score with good credit history.

    This loan can help you with paying off your loan in next 3-5 yrs if you go by plan. It only works in California where the appreciation on real estate is good.

    Need more info on which program you should go for, write me your question at:

    kay_pof@yahoo.com

    and i will answer your question right away.

  • 1 decade ago

    I'm a loan officer. It is a payment rate that can change in the future. You will owe a higher rate- but only have to pay the lower rate initially. You are adding to what you owe each month. Loan is good for being able to buy 2 investment poperties, instead of only one & gives you more cash flow. Also will allow you to invest the difference the first 3 years & can earn interest on it(maybe in stock market, etc). Let's you pay less temporarily- not for everyone.

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  • 1 decade ago

    I'm not a loan officer or anything but that sound like a negative ammortization loan. Basically, a loan that will never be paid off if you don't refinance in the future, plus will eat into your equity if you keep this loan too long. It can be useful if you are in a crunch and need to lower your payment for a while but I would refinance it quickly thereafter.

  • 1 decade ago

    Variable rate will go up with time. Low interest loans always have a catch. Find out what the simple interest is to compare.

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