loan type: Minimum Payment Loans
minimum payment plans
You start with a low introductory payment plan that expires after an initial period (3-5 years).
You are "buying-down" the rate by paying back-end points or adding interest rate charges to your mortgage loan commonly referred to as negative amortization.
About Minimum Payment Plans
Mortgage loans with initial low monthly payments,
These plans are referred to as minimum monthly payment plans. You will pay low, monthly payments for an intial period.
advertised $145,000 mortgage for under $484/month.
Low monthly payment plans have become popular,
Particularly in markets where housing cost are high. Low monthly payments allow many homeowners to afford higher-priced real estate purchases.
Basically, the mortgage loan starts out with initial low payments (usually under a 3-5 year plan) with the option to refinance your mortgage loan -- with additional costs related to the initial low payments -- when market values or your financial situation improves.
Lenders are in the business of making money,
So when lenders offer you a low, minimum payment plan, they are lending you money below cost.
Lenders make up the difference by:
- charging high up-front points (in other words, you buy-down the rate: see mortgage buy downs)
- or they add the cost difference to your loan amount — thus increasing the amount of mortgage loan that you must payback or refinance — commonly referred to as negative amortization
Let's use this cost comparison table to illustrate:*
* table is for illustration purposes only. APR rate, terms, and payoff amounts my differ by vendor. Discuss with your lender about individual product terms and conditions.
What the numbers are showing:
|30-Year Fixed Mortgage Loan|
|•||Monthly payment: $899.33|
|Interest-Only Mortgage Loan|
|•||Monthly payment: $750.00|
|Minimum Monthly Payment Plans|
|•||Monthly payment: $499.88|
Note: numbers are for illustration purposes only.
Read the Find Print Before You Sign:
Make sure you understand your repayment obligations before accepting a minimum monthly payment plan.
These plans generally contain the following terms:
- the minimum payment is generally an introductory payment plan that expires after an initial period (3-5 years).
- by maintaining a low-interest rate payment, you run the risk of negative amortization.
This means that the lender will tack onto your mortgage loan additional borrowing amount to make-up for the lost interest.
- borrowers may be required to pay up front points to qualify for the minimum monthly payment plan
- the interest rate is variable and can change either daily or monthly depending on the lender terms
- at the end or your introductory payment plan, your mortgage loan (plus any added interest) will be amortized at prevailing rates for the remaining term of your loan.
Your new monthly payment can jump 2-3 times over your current payment.
Who can benefit from Minimum Payment Plans:
Minimum monthly payment plans can help many first-time owners to qualify for a home -- especially in high-priced real estate markets.
These loans can benefit homeowners who capitalize on rising market values. Since many homeowners expect to move or refinance their homes after 5-7 years, homeowners with minimum payment loans will simply move out of the loan obligation by taking on a new mortgage under favorable conditions.
These loans benefit investment property owners who use low payment plans to finance rental property.
Why consider minimum payment mortgage loans
- allows you to get into your first home with lower payments
- allows you to afford a bigger home
- allows you to reduce your housing/debt ratio
- allows you to invest monthly savings into your home
- allows renters to effectively "lease their home" for tax benefits
- allows you to maximize your cash flow
- allows for a financial positron in investment real estate
Disadvantages of minimum payment loans
- you are not building equity
- you run the risk of negative amortization
- if the markets decline, you could lose money
- allows consumers to carry too much debt
- adjusting minimum payments by the lender may impact your cash flow payments
- consumer runs the risk of not being able to meet debt obligations if personal economics fail to materialize
Run your numbers to compare cost:
download amortization worksheet:
click here to download
Mortgage Lending Options