You want to check to be sure you are not paying 1.95% but being billed a higher rate that is tacked on the back of the loan.

Common tricks like this have a 5% mortgage, you pay 1%, the 4% gets added to what you owe. So instead of building equity in the house you actually lose equity.

Not saying that is what you have here, but that is a common loan now and you want to watch out for that.

I would wonder if this is a negative amortization loan. Ask (in writing) if there is any possibility that at any point (such as at the end of the 5 years) if you would then own more than you owe when you take out the loan. Also find out what your loan payment jumps to at the end of 5 years.

My guess is that at the end of 5 years, you will have a balloon payment due, or another mortgage with a much higher interest rate.

Have you discussed the amount borrowed, and the amount of the payment. Does it seem that the borrowed amount will be paid off at the end of 5 years when you figure in the 1.95% interest.

I'm curious...would you mind sharing the name of the reputable mortgage company. I wouldn't mind a loan with that kind of interest, if there are no loopholes or surprises.

I'm pretty sure there is some sort of 'catch' to it.

Sue

It sounds like an "Option ARM" product. You will be given the 'option" every month as to what payment you want to make. If you only make the minimum payment, you will end up owing more money than the original loan (negative amortization).

Option ARMs were initially created for mostly self-employed people that had uneven cash flows. AND were very financially sophisticated. They could then choose to make the basic payment when their cash flow was low, and pay a lot to principal when their cash flow was high.

If they offered this to you without explaining IN DETAIL how the product works, please find another lender to do business with.

This is certainly not a product for a beginner ...

Hope this helps.

Thank you all for responding to my post. All of you were correct in your comments.

First, the reputable company that I was told was reputable turned out not to be so reputable afterall once I did my own Private Eye Work :-) on the internet (Can I mentioned the company name on this site?)

Plus this type of loan is considered a negative amortization as stated in the comments which mean instead of your balance decreasing it increases...who in their right mind would assume a loan of this type?

Anyway, the gentleman called me at work today and I was very nice but I did not give him any impression that I knew what type of loan this was. He goes on to tell me how much money I would save with this 1.95%, 5-year fix but left out the most important info but being me I let him continue with the lies he were telling. I think it bothered me more because if I had not made myself familiar with this type of loan after reading all of your responses, I would have been one of those SUCKER!!!! that he would have licked all the way to the bank.

I think at one time he felt as though he had sold the info to me and I was going to accept but that's when I asked him...WHAT IS THE REAL PERCENTAGE????? I further explained to him that I read a 1.95% loan could actually be a lot higher (i.e., 7.15%) but of that 7.15% you only pay 1.95% for the 1st 5 years...so say for instant the figures comes out to be 5000.00 a month for the mortgage based on the principle balance of the house....you take 1.95% of that then deduct that figure from the 5000.00 original mortgage...BUT THIS IS THE KICKER....whatever the difference...it is added to your principle balance for the next 5 years....so say it was 1/2 of 5000.00, $2500.00 would be added to your principle balance for the next five years.

The gentleman also stated...oh by the way your mortgage will go up slightly each year during those five year in the amount of around 200.00. ARE YOU CRAZY FOR EVEN TELLING ME THAT :-)

I then asked him, so a person getting this type of loan will put them right back in the same status when they initially applied. Sounds to me this type of loan is for someone who is HOUSE POOR or about to lose their home which I neither of the two.

I politely told him NO and I am just fine with the current loan I have.

There is an article on www.money.cnn.com that talks about these types of loans and how dangerous they can be.

Thank you guys so much. Without your responses I would not have dug so deep into the internet for info regarding this subject.

Who wouldn't want a 1.95% loan...I DEFINITELY WOULD but only if it was legitimate.

Once again, thanks.

Hmmmm, I would have been so steamed with/at him.

I think I might have told him to write up the paperwork, made an appointment to meet with him for signing, and then just have been a no-show.

It's sad to think that some folks do indeed get suckered into that sort of financing.

Thanks for posting the outcome.

Sue

ambitiousbeginner,

"Who in their right mind would assume a loan of this type (negative amortization)" ....

Can you spell "credit card"?

If one makes minimum monthly payments, the balance owing is only reduced by a miniscule amount ... I'm not sure whether they can set up a situation where one pays less than the amount of interest due that's added to the account in that month, which would mean that the balance owing actually would increase.

Learning how money works - an interesting hobby ...

... **THAT PAYS WELL**!!!

ole joyful (20 years a personal financial advisor)

Good on you for doing your research first! I just had dinner with a girlfriend last night and she has been approached by a scam artist who wants her to refinance her home (thourhg his company), with a 1% mortgage, take all the cash out of her home and put it into a variable annuity - all through his company, oh AND? Would she also be interested in selling such services herself? She can attend this company's seminar/training course for a fee and she'll be on her way to millions in commissions!

Good lord!!!

Hi ambitiousbeginner,

Plus this type of loan is considered a negative amortization as stated in the comments which mean instead of your balance decreasing it increases...who in their right mind would assume a loan of this type?

Right, this is a program that allows the borrower to defer some of the monthly interest payments into the future. The SPECIFIC program this one guy pitched you is a program that has both it's payment rate and the actual interest rate fixed for 5 years. He was obviously "selling" since you were left without any real understanding of the valid functional benefits... he probably doesn't even know them himself.

Who in their right mind would use this type of program? People who;
A) Are highly responsible in their personal budget management, tend toward being compulsive saver/investors, and do not automatically consume more lifestyle when they discover they have more money in their pocket (or checking account,)

B) Understand that tax-deferred investing returns far outpace tax-deductible home mortgage leverage, thus want to direct as much of their monthly budget to a more productive investment/savings vehicle rather than a non-productive real estate equity position,

Who are INSANE to use such a program? People who;
1) Spend/consume ALL the money they have left over after they pay their "must" bills,

2) Think that lottery tickets are good retirement investments,

3) Operate from emotion more than educated & reasoned logic,

4) Cannot afford their home UNLESS they make ONLY the absolute minimum payments,

5) Have little or no safety reserves, resources, and/or insufficient insurance.

These loans are like scalpels... magic in the hands of surgeons, murder in the hands of irrational idiots. The only thing truly dangerous about them is the financial awareness & intelligence of the borrowers who are not capable of managing the greater financial control they provide.

It is unfortunate that it is still legal for lenders to "pitch" these programs for ALL the WRONG reasons. It is very hopeful that soon we'll have recourse to take down sleazeball loan salespeople like that.

Luck!
Dave Donhoff
Strategic Equity & Mortgage Planner

That sounds like a really great rate on the home loan. I have 5% with GMAC Mortgage although my credit score was not perfect. It does sound like a bargain now with the new current rate with GMAC.

Here is a link that might be useful: GMAC Home Loans

It appears that many such loans were put together, then instead of the lender carrying them themselves, peddled them to others, after getting the ratings services to give them a good rating.

When the rate was adjusted to reality, many borrowers could not carry on and either sold their homes themselves or let them be foreclosed ... after which it often became difficult to sell them for the amount owing.

My bank was involved with not only such mortgages, but similar commercial paper as well, I think.

Plus they were backing a mortgage insurance company, I've heard - which recently was in danger of bankruptcy.

In any case, from a high of $107. for each of their shares last May, to a low of under $60.00 in March, during which there was a reduction in the stock market as a whole, but not nearly that drastic, I've "lost" (current value, at least) several thousand dollars to this kind of malfeasance in the past year.

Many people in other parts of the world have, as well, I think ...

... which adds more unhappiness in the minds of many in other parts of the world when it comes to the reputation of the U.S.

Which may lead some of you who have accused me of being anti-U.S. to accuse me once again.

Let me assure you that I do not want to see the U.S. fall even farther into disrepute in the political and economic aspects of world affairs, for if the U.S. economy tanks, the Canadian economy will tank much more drasically.

And there are larger numbers drawing pensions all of the time, with fewer paying in, so my pension may be at risk if many of that reduced number of contributors to the pension plan lose their jobs if the economy goes really bad.

Even if that possibility may be somewhat remote, and becomes less worrisome each year, since it means that I have fewer future years in which to need full coverage ... it is one that I view with some trepidation, as I like to hope that I don't have one foot in the grave, as yet.

Good wishes for increasingly skilfull management of your income and assets ... you'll become increasingly thankful for such effort expended in learning how, over the years, if you do, I assure you.

ole joyful

In determining mortgage scams just do a quick check. If banks and such are paying a minimum of 2.5% on their CD's they will always add on 2%-3% to any of their loans and normally much more. So, if you see a mortgage for 2% or 3% you should know it's a scam. In other words, how would any financial institution stay in business if they loan the money out for less than they are paying for it?
Mortages from builders in trouble or car loans can be all together different. There are many games to be played there.

Folks,
This thread was dug up from almost a year back... and if you look just a little further upthread, I explained what the 'deferrable' programs are (or were.)

They are once again very rare (though still available,) and are very sharp instruments best used only by the most financially savvy.

Cheers,
Dave Donhoff
Leverage Planner