Adjustable Rate Feature
NegAM loans today are mostly straight adjustable rate mortgages (ARMs), meaning that they are fixed for a certain period and adjust every time that period has elapsed; e.g., one month fixed, adjusting every month. The NegAm loan, like all adjustable rate mortgages, is tied to a specific financial index which is used to determine the interest rate based on the current index and the margin (the markup the lender charges). Most NegAm loans today are tied to the Monthly Treasury Average, in keeping with the monthly adjustments of this loan. There are also Hybrid ARM loans in which there is a period of fixed payments for months or years, followed by an increased change cycle, such as six months fixed, then monthly adjustable.
The graduated payment mortgage is a "fixed rate" NegAm loan, but since the payment increases over time, it has aspects of the ARM loan until amortizing payments are required.
The most notable differences between the traditional payment option ARM and the hybrid payment option ARM are in the start rate, also known as the "minimum payment" rate. On a Traditional Payment Option Arm, the minimum payment is based on a principal and interest calculation of 1% - 2.5% on average.
The start rate on a hybrid payment option ARM is higher, yet still extremely competitive payment wise.
On a hybrid payment option ARM, the minimum payment is derived using the "interest only" calculation of the start rate. The start rate on the hybrid payment option ARM typically is calculated by taking the fully indexed rate (actual note rate), then subtracting 3%, which will give you the start rate.
Example: 7.5% fully indexed rate - 3% = 4.5% (4.5% would be the start rate on a hybrid pay option ARM)
This guideline can vary among lenders.
Aliases the payment option ARM loans are known by:
- Negative Amortizing Loan (Neg Am)
- Pick - A - Pay
- Deferred interest option loan (this is the way this loan was introduced to the mortgage industry when first created)
Read more about this topic: Negative Amortization
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