PickMyMortgage.com

Loan Product Summary

SUMMARY Minimum Monthly Payment Plans advertised as: $200,000 for $XXX/month. You will hear and see advertisements where your new or existing mortgage payment can be reduced. Plans include $80K, $145K, $200K and even $300K mortgages at unbelievable low minimum monthly payments. These plans are designed for homeowners who are looking to pay lower initial payments at the start with the expectation to refinance their mortgage later on. CAUTION: read the fine print before you sign. These plans can cost your money. 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. Minimum payment plans also help homeowners meet the housing ratio qualifications. Introductory Rate Plans the minimum payment is generally an introductory payment plan that expires after an initial period (5-10 years). The interest rate is variable and can change either daily or monthly depending on the lender terms. By maintaining a low-interest rate payment, you run the risk of negative amortization. Read the fine print before you sign:

 

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Loan Advantages and Disadvantages

ADVANTAGES Low Initial Payment generally the lowest monthly payments plans available in the market Allows Purchase of High-Priced Homes designed for homeowners in high-priced markets Savings to Reduce Principal your monthly savings can be used to pay the principal or other debts   DISADVANTAGES Negative Amortization potential negative amortization that increases your total borrowed amount Payment Increase once your initial period ends, your payments may increase 3-4 times

 

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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.

Example:
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:*

Types Mortgage Plans 30-Year Terms Fixed Plan Interest-Only Minimum- Payment Mortgage Loan Amount: $150,000 $150,000 $150,000 Interest Rate (APR): 6.00% 6.00% 1.25%  Monthly Payment: $899.33 $750.00 $499.88 Your Mortgage Payoff Position After Month 1 Principal Repayment: $149.33 $0 $0 Potential Negative Amortization: $0 $0 $250.02 Payoff Amount: $149,851 $150,000 $150,250 Your Mortgage Payoff Position After Month 12 Principal Repayment: $157.75 $0 $0 Potential Negative Amortization: $0 $0 $250.02 Payoff Amount : $148,158 $150,000 $153,000

* 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
	under the standard fixed-rate term, your monthly payment is larger. Part of your payment is used to payoff the interest and another part is used to pay down your mortgage loan. Under this repayment plan, you will payoff your mortgage within 30 years.
Interest-Only Mortgage Loan
•	Monthly payment: $750.00
	under the interest-only plan, your monthly payment is calculated to payoff the interest on your loan only. No part of your payment will reduce your mortgage loan. Your payoff amount will be the amount you borrowed.
Minimum Monthly Payment Plans
•	Monthly payment: $499.88
	under the minimum-monthly payment plan, you start out with the lowest monthly payment. Since the lender is lending money below cost, the difference between the full cost of interest and the interest you currently pay is added to your mortgage loan amount. Your payoff amount will increase over time. 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:

loan comparison calculator

download amortization worksheet:
click here to download

Note: The loan information above is general information related to mortgage products and the mortgage lending process. The information does not represent terms of any particular lender. Lenders whom you may work with may offer different product terms.

PickMyMortgage.com is not a lender. Therefore, we cannot quote rates or guarantee best terms. We refer applicants interested in getting a lending quote to Secure Rights, a licensed mortgage broker representing multiple lenders.