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agachua · Joined: 29 Jan 2008 Posts: 1 1.42 Dollars($)

I received an offer for 30yr fixed pay option:
30 year fixed net effective: 4.25% interest rate
Pay option rate: 1.25%

If I always pay the "30 year payment" each month on this pay option mortgage, is it the same as paying monthly on a traditional 30-yr fixed at 5.5% APR? Will my payment ever increase?

larry · Joined: 27 Jun 2007 Posts: 3322 474.67 Dollars($)

Hi Agachua ,

Welcome to the forum.

Are you talking about Pay option ARM which begins with very low interest rate?

See it depends upon you; in which program you are satisfied with but I think 30 year fixed rate is better.

Thanks.

michelle · Posted: Tue Jan 29, 2008 4:38 pm Post subject:

Welcome to the forum Agachua,

If what you typed is correct, then yes, you would pay off the loan faster if you made the full payment.

I doubt, however that you have the terms of the loan correctly. I believe the 4.25% you refer to is actually the Index Value of the ARM. The fully indexed rate is probably closer to 7%.

If that is the case, you would be much better with the fixed rate. Although there are times when the option arms are good products, it sounds like your plan is to make the 30 year payment anyway. You would be much better off with the 30 year fixed loan right now.

Please let us know if you have any other questions.

greg1 · Posted: Tue Jan 29, 2008 6:28 pm Post subject:

The 4.25% is likely the loan margin. You take the loan margin + the index rate (such as LIBOR, MTA, COFI) and that is your interest rate you are charged on the loan. I would say between 7 and 8%.

The word "effective" is a predatory lending term. There is no effective rate of interest.

To help you understand this 1.25% minimum payment. If you pay that your loan balance will increase. Lets assume your interest rate is 7.5%. You are paying 1.25% of the interest on your loan and the balance is growing at a rate of 6.25% time the balance divided by 12 every month. That is as simple as I can put it to give you an idea. Strictly an estimate to help you understand.

You will pay more for a Pay Option Arm no matter how you look at it. The interest charges are more than a fixed rate and the only thing that would be financially desirable about that loan is the temporary option to defer principle and/or interest payments to resolve an unexpected financial expense or hardship by selecting the interest only or minimum payment option possibly avoiding late bill payments or use of high interest unsecured credit.

In the end these loans are a financial disaster and currently the margins are increasing due to high default rates on the product.

gmakerley · Posted: Wed Jan 30, 2008 8:23 am Post subject:

agachua, what you describe is a bad deal - plain and simple.

the countryside is littered with people who "took advantage" of this reduced payment plan. the reality of it all is that they were the ones taken advantage of.

run and do not walk away from this.

lisascherzer · Joined: 04 Jan 2008 Posts: 755 1.12 Dollars($)

Hi agachua,

There is no such thing as a "net effective rate". This is BS that the mortgage company is feeding you. The option arm mortgage has a monthly adjustable rate that starts out at a minumum of 7% and most of them are closer to 8% right now. It will adjust monthly. There are fixed rate pay option mortgages but the rate is at least 6.75 on the fixed program. The mortgage company should be stating what the actual interest rate is. In your case, I think it could be an adjustable rate if they are not giving you accurate quotes.

If you want to pay the 30 year payment then I suggest that you go with a 30 year mortgage or at least go with a mortgage broker that will clearly explain the pros and CONS of this type of the pay option mortgage loan.

Also, your minimum payment will increase yearly by 7.5% and your interest only payment will increase as well if your mortgage rate increases.

The pay option mortgage is good for one thing. If you NEED to have reduced payments and don't mind paying a premium (a higher mortgage rate) for the privledge of reduced payments. This is why many people regret getting into this mortgage. Many are paying 8% or more interest to have reduced payments that they don't need. Most thought the rates were lower than what they were because they were lied to.

I can't believe that there are still mortgage loan officers lying to people to get them to sign on this type of mortgage. It is truely disgusts me to hear what this loan person is telling you about this type of mortgage even though I have heard this same story over and over. Don't be another one that signs on the dotted line based on lies.

I urge you to contact a trustworthy mortgage broker to discuss the pros and cons of the mortgage programs that would work best for you.

jeffselan · Posted: Mon Feb 04, 2008 5:32 am Post subject: To Further.

Please take the time to take this loan to another lender or broker to explain your terms. Even an attorney. It appears you do not quite understand the terms and I am afraid you are in danger of financial distress.

In other words, get a second opinion.

edited to remove link

evolovik26 · Posted: Mon Feb 04, 2008 8:34 am Post subject:

boy some brokers sure go to big troubles nowdays to scam people.
Look payotion is not a good long term loan period.
There are few situations when it can be good for you but yours is not one of them.
Get away frome this you are being scammed. Go get a regular loan. Should get under 6% now and if payment seems higher then you like it to be then you tryin to buy a property you cant afford.

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30 year fixed pay option better than traditional 30 year fix