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Posted by Rainmaker on June 19, 2006, 9:39 am
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>
>> The answer is it doesn't.
>>
>> The only thing that reduces neg am is interest and principal payments.
>>
>>
>> In reality, extending the amortization time would have a growing effect
>> on neg am not a shrinking one.
>>
>> Compare the total interest paid for a loan at 6.00% for a) 30 years; b)
>> 40 years. You will pay 115, xxx in mortgage interest in 30 years
>> (approx. 3,8xx per year) vs. 164,xxx in mortgage interst for 40 years
>> (approx. 4,1xx per year). This is due to the negative effects of
>> compound interest and extended time.
>>
>> Anyone that is selling this loan and doesn't understand the math and
>> computations shouldn't be Can you explain to the borrower what could
>> potentially happen under three rate scenerios (best case, worst case,
>> mean average)? how can you truly say that you are doing right by
>> someone when you can't understand the math?
>>
>> There are only two ways to decrease neg am in any neg am loan:
>>
>> 1. Increase the monthly payment amount (to compensate for the
>> accumulation of neg am; making interest only payments negates the
>> creation of neg am; making fully amortized payments reduces the future
>> possibility of neg am).
>> 2. Increase the frequency of payments (combine neg am with bi-weekly
>> and reduce the mortgage shelf life from 30 to 26 years and reduce the
>> total accumulated neg am exposure by a min. of 33%).
>>
>> I know these products inside and out, so much so, that I don't
>> recommend them for everyone and I don't recommend that everyone be
>> allowed to sell them.
>>
>> Regards,
>>
>> Scott Miller
>> National Commercial and Residential Lender/Broker
>> Carteret Mortgage
>> 1.877.716.6495
>> EZMortgageLoanz@aol.com
>>
>> www.RealEstate-IQ.com
>> www.EZMortgageLoanz.com
>> M.D. wrote:
>>> Hello Rainmaker, Im a Mortgage Broker rookie, so my question is if you
>>> can
>>> please explain why and how a 40-year amortization reduces the amount of
>>> neg-am every month, thank you.
>>>
> I'm sorry that I don't go back and peruse old threads more often; I missed
> this one.
>
> The neat thing about our 40-year MTA is that there is no hit to the rate
> or margin. Consequently, while the borrower will obviously pay more
> interest over 40-years, as Scott-with-a-dollar-sign figured out with his
> four-function calculator, they actually acrue less interest due each
> month. Because there is less interest due, there is less interest
> deferred. Make sense?
>
> Grab your HP (or one of the many spreadsheets available for this loan),
> and do the calcs.
>
> Now, it's Monday morning; everybody back to work!
As soon as I hit "Send" I knew I'd mis-spoke. There is a 10bps hit to the
margin for a 40-yr MTA, but it still reduces the monthly interest accrued
over a 30-yr loan. I hate it when that happens!
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