A Question Concerning Negative Amortization Florida Home Loans
He’s known simply as Dr. Don. But this expert from Bankrate.com knows a lot about saving up for - and choosing the proper - Florida mortgage loan. With that in mind, let’s take a look at a recent exchange he had with an individual considering an investment in an Orlando condo converstion.
The seller is offering incentives and financing. The choices at hand are between a negative amortization Florida home loan of 1.25 percent and a fixed-rate mortgage at 7.5 percent for 30 years. Which is better?
A Florida home loan response ….
With a negative amortization Florida home loan, if the monthly payment isn’t sufficient to cover that month’s interest expense, the shortfall is added to your outstanding loan balance. That’s not the end of the world if you’re investing in real estate and want to minimize your monthly cash flow while you own the property, but there are some potential pitfalls to this type of financing.
It’s likely you are being shown what’s known as an option adjustable rate Florida home loan, where you have three options:
- Make a minimum payment that doesn’t cover that month’s interest expense, resulting in negative amortization
- Make a payment that does cover that month’s Florida home loan rate expense
- Make a payment that covers both the interest expense and has a principal repayment component equal to the amortization payment on a 15-year or 30-year mortgage.
If you chose this type of financing, make sure you understand how the interest rate on the Florida home mortgage loan can adjust. Typically there are interest rate caps and floors, both per rate adjustment and over the lifetime of the loan. The quoted 1.25 percent rate is a teaser rate for a stated number of payments, and the fully indexed interest rate could precipitate a much higher monthly payment - even with negative amortization.
In other words, this is another example of a nontraditional Florida home loan. As long as you’re aware of the possible pitfalls and understand all aspects of what’s involved, such a mortgage could be the best decision to make.
Other Florida mortgage loan considerations
There’s been no mention your credit score, credit history, income or what size down payment you plan to make on this condo investment, but 7.5 percent seems a bit pricey on the 30-year fixed-rate Florida home mortgage loan. There could be concerns about what the fully indexed rate actually is on the adjustable-rate mortgage.
One potential problem with a condo conversion is the resale value for these units hasn’t been tested, making the potential appreciation speculative. Add that risk to the risk of a negative amortization mortgage and you need a lot of things to break your way in order to make this a profitable investment.
