Posted by Charles Clark on January 18, 2003 at 13:45:51:
Hi Philip,
It sounds like a “Negative Amortization” “NegAM” loan. These are great as long as the client is well informed as to the possible downfall. For most of them that I have seen, You have to keep informed as to exactly what you owe. If the interest rate on the loan can only go up 7.5% per year, and the real interest rate that it is calculated on goes up substationally more than that, you could end up in a negative situation, ie oweing more at the end of the year than when you started. Still no major problem, as the property might be going up in value faster than that. The real problem is that sometimes the fine print says that if you end up oweing more than 110% of the initial loan, it can be changed by the lender to a conventional 30 year loan, at prevailing rates. Whatever that means.
So, good idea for some investors, but read the fine print, and wonder why if 10 year government bonds,the safest thing on earth are yielding over 4%, can this be at less than that.
Charles Clark