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Hi,

We are interested in knowing about a few options that may help us to choose the right one that fits our situation. We are interested to do a cash-out refinance worth more than $450,000 and pay off a pick-a-payment Option ARM with an MTA index. The margin for the index is 3.5%. It's not that we will be paying only the interest-only or the minimum payment. My husband works off commission, so lower payments will be useful only in certain situations.
The payment options for the refinance loan are minimum payment, interest-only, fully amortized and 15 year amortized payment.

Currently another company says that it's a terrible offer and we are to lose a lot of equity in the first few months itself. To her, I seemed some sort of predatory lending to provide this type of pick a pay arm and she said they hardly offer such loans any more. She said if I pay anything except the 15 year amortized payment, I may be in negative amortization. She suggested that we go with a 7.2% ARM-2 year fixed with a 3 year pre-pay clause. The payments would be somewhere above $3000. I don't know what to choose? Any advice will be appreciated.

jerry · Posted: Mon Apr 16, 2007 11:39 pm Post subject: RE: suitable refinance option

Hi gyles,

Welcome to the forums.

I don't agree with the lady here. The only way by which you can get negative amortization is to choose the minimum payment option. When you go for this option, your monthly payment is even lower than the interest that you should be paying every month. Hence the difference in the interest and the minimum payment is added to the principal each month which thereby increases your loan balance and results in negative amortization.

For more information, you can visit here.
Thanks,
Jerry

Guest

how long do you plan to stay? if you are not going to move out within say another 15 years then taking a fully amortizing frm will be more beneficial than choosing a arm.

negative amortization will only occur if you do not pay the principal part in your monthly payments and only pay the interest.

if however you be moving out say within 5-6 yrs. then a 5/1 arm (rates are somwhere 5.9%) can be an option you can look at and compare the rates that are being offered. but taking a 7.2% ARM-2 year fixed with a 3 year pre-pay clause is not a very good suggestion from that lady.

kenstampe · Posted: Thu Apr 19, 2007 9:08 am Post subject:

the reason that loan officer told you that, is because a sub-prime 2 year arm with a 3 year prepay is all she has to offer. That's complete garbage! RUN!!!!

Now, I understand perfectly why you want to get away from the POA and I also understand why a fully amortizing loan doesn't give you the payment flexibility which your husband needs due to his compensation schedule.

What I don't understand is why take out a loan on a 15 year repayment schedule? You can take out a 30 year loan with an interest only feature and pay it back in 15 years if you so desire. The 30 year amortization would provide you a lower payment for those months you need it.

hamlisch asks a great question when talking to someone about refinancing....how long do you plan to stay? Although if you have a pay option arm now, I'd consider refinancing unless you plan to move in less than 18 months.

good luck.

Samantha · Posted: Mon Apr 23, 2007 5:23 am Post subject: RE: MTA vs COSI index

Hi Gyles,

I feel you should stay away from the MTA index and try out with a more conservative index like the COSI so that there is less risk of being unable to make the payments.

The COSI is a far more stable index compared to the MTA. It does not depend upon the fluctuations in the economy. This is because it represents the average of the yields of bank's certificate of deposits in the 11th District and the Fed Funds. So, even if there is a change in the Prime rate and a corresponding change in the Fed Funds rate, there isn't a large variation reflected by the COSI. Home loans tied to the COSI are comparatively stable with respect to those tied to any other ARM index.

Hope this helps...

God bless you.

Samantha

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Refinance MTA index pick-a-pay loan with ARM-2 year fixed?