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Trapped with a Negative Amortization Loan? Steps to Move to A Fixed Rate Loan

     Over 2 Million American families have found themselves to be an unlikely statistic as foreclosure rates continue to skyrocket, even causing some lenders to fail. Fannie Mae and Freddie Mac needed a "bail-out" of themselves from the government. The foreclosures are still occurring, with another wave about to begin in 2009.
Many of these will be Pay Option Arm borrowers. This is the Negative Amortization loan that was very popular the last 5 years. It is likely that Congress will outlaw the sale of these loans to unsuspecting borrowers in the coming months.
The Pay Option Arm comes with 4 payment options each month. The "minimum" (Neg AM) payment, interest only, 30-year (principal and interest) and 15-year (principal and interest). Minimum monthly payments were based on a teaser rate of somewhere between 1%-4% that provided negative amortization on the loan.25%. While a person may be able to get this loan, it is often the case that a qualified borrower may only be able to make the minimum negative amortization payment each month. The interest only, 30-year fixed and 15-year fixed payments are based on whatever index the loan was based on, such as LIBOR, COFI, CODI, MTA, etc., plus the margin giving you the fully indexed rate. The fully indexed rate is usually margin plus index Many interest rates are closer to 8% and 9% rather than the range of 7-9% listed. Most borrowers therefore paid the minimum negative amortization payment of 1% which gave them a substantially smaller payment - but increased their mortgage balance with each payment.
Most people aren't familiar with the word "recast", so they might not understand that foreclosure may be in their new future, even if it's already in their Pay Option Arm loan. This information is essential.
Recasting percentages differ based on the lender. Most recast at 110%-115%. What this means to the borrower is this: If you have paid only the negative amortization minimum monthly payment for 3+ years or are getting close to it - your loan will recast sooner than you may have expected. If the loan recasts, the bare low negative amortization and the lone interest payment preferences vanish.
The borrower is left with only two payment options, the 30-year and 15-year fixed payment options at the fully indexed rate of 8% plus. Not only that, all of the negative amortization or as the lenders call it, "deferred interest" has increased your original loan balance at the same time their property values are falling in value. Result, most borrowers in Pay Option Arms find themselves upside down with no options other than to walk away or attempt a short sale.
Either way they either severely damage their credit or walk away with no money and sometimes have to pay taxes on the loss from the short sale.
Depending on when your loan is set to recast - you can find this information on the "Note" with your original loan documents. It is possible that it will say "Adjustable Note", etc. Note is the most important word. If your loan is set to recast at 110% of the "original" loan balance, if you do the math you can expect to recast in about 3 years. If the terms on the note call for a 115% recast, then you will recast before 5 years. Either way, borrower's will then find themselves with a payment they cannot afford and they won't be able to refinance because they will most likely either be upside down or have very little to no equity. They have no way of converting into a fixed rate mortgage, as they are stuck in the Pay Option Arm.
When given the option or selling their home or being able to renegotiate their current loan, keep the payments affordable and convert to a fixed rate mortgage - statistics indicate most borrowers would ultimately choose to keep their home.
Loan Modification is a great option to help you with this. If a lender is willing to work with you to change your mortgage terms to something that is less of a hardship for you, that's called loan modification. Making your loan more affordable is the purpose. Usually it is in the form of a rate reduction and conversion of an ARM, typically a 30 year fixed.
Previously, this was only available if the borrower was behind in his or her payments and had experienced some kind of hardship, such as a job loss, divorce or illness. Home owners that still are paying a mortgage can seek assistance from their banks for affordable rates.
Loan Modification services should include the initial consultation, compiling the full application, the processing of the application, the underwriting of the proposal, written legal contract of the proposal, legal department's made up of brokers, attorneys, and paralegals communication for negotiation of the proposed modification, final resolution of the proposal and the final step which is executing the new contract and modifying the loan to meet your needs.

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Paul Chavez is a California licensed Real Estate Broker with over 10 years of experience specializing in out-of-court resolutions of Mortgage Foreclosures by negotiating with your lender allowing you to stay in your home with lower payments. Get a consultation with no charge or obligation. Let our expertise help you save your home. We can give you the Foreclosure help you need. If you are struggling to pay your monthly mortgage, visit us at: - So you can sleep soundly again, starting tonight!

Posted on 2008-11-16, By: *

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