What is a Neg Am loan?

The Neg Am loan (also called Option ARM) is an Adjustable Rate Mortgage that gives the borrower up to 3 different payment options each month. This puts the borrower in control of their finances by allowing them to make the payment that best fits their financial situation each month. The payment options include a Minimum Payment (Neg Am), Interest Only Payment and 30 Year Amortized Payment. (See also the Glossary Page for more information).

What are the advantages and benefits of a Neg Am loan?

• Increased savings and cash flow because of the low monthly payment.
• Easier to get loan approval.
• Qualify for a larger, bigger and better home.
• Choice of 3 payment options each month.
• Low doc option (Stated Income).
• Don�t need A Credit to qualify.
•  Low rate (1.75% or 2.25%) locked for 3 or 5 years.
• Pay no points for a purchase and pay nothing for a refinance.

(See Benefits of a Neg Am Loan Page for more detailed information)

What is the index?

The index is one of the two components of any ARM interest rate and it is the portion that adjusts on a periodic basis. Each index rate is based on a 12-month rolling average, which means the index moves very slowly. (For a complete listing and description of all the indexes please go to the Index Page of this site).

What is the margin?

The margin is a fixed percentage that is added to your index. Your margin will remain the same throughout the life of your loan.

What are the caps?

The Neg Am loan usually has two caps, a payment cap and a lifetime cap. These caps will prevent your payment and interest rate from increasing too quickly in a high rate environment.

Payment Cap

Most Neg Am loans usually have a 7.5% payment cap. This means that your payment will not increase or decrease more than 7.5% each year. For instance, if your minimum monthly payment for the first year is $1,000, then your payments maximum increase can be 7.5%, which is $1,075 the second year. If the Neg Am loan has a fixed pay rate (1.75% fixed for 3 years or 2.25% fixed for 5 years) then the payment cap will not apply. Your payment will be fixed.

Lifetime Cap

The lifetime cap is the maximum interest rate that your loan can increase to. Usually the lifetime cap is 9.95%

What is the start rate?

The start rate (also called the pay rate, the rate, the low rate or the minimum rate) is the initial interest rate that your minimum payment is based on. You are still charged the fully indexed rate, however, your low payment is based on this rate. Typical start rates are 1.0% with a 30-year amortization and 1.25% with a 40-year amortization. By making the minimum payment you may incur deferred interest. Deferred interest is explained below.

What are the payment options?

Each month, you will have 3 payment options. This allows you to change your monthly payment depending on your cash flow needs.

Minimum Payment

This is the minimum payment that needs to be made each month. This payment is based on the start rate and may create deferred interest.

Interest Only Payment

This payment covers only the interest you are charged each month. This payment does not reduce your principal, however, it does not incur any deferred interest either.

30-Year Principal and Interest Payment

This payment included the interest and principal necessary to pay your loan off in 30 years.

Will the loan have a prepayment penalty?

Depending on your situation and the options you choose, your loan may have a prepayment penalty. However, you can still make extra payments on your loan if you choose.

What is deferred interest? How can you avoid it?

When you make the minimum payment, it often does not cover all of the interest that is due for that month. Deferred interest is unpaid interest that gets added to the balance of your loan. Deferred interest is tax-deductible in the year that it is paid. You can avoid deferred interest by making one of the other payment options.

Why is a Neg Am Loan better than a fixed rate loan?

Currently, fixed rate loans have a higher interest rate and a higher payment than the Neg Am loan. The lower rate of a Neg Am loan allows increased cash flow that results which enables you to use that money to address other financial needs such as paying off high interest rate debts, college tuition, investment in your retirement account or other investments. Your mortgage becomes more than just another debt it becomes a wealth-building tool to help you manage your finances. This flexibility is not available with a fixed rate loan. (See Benefits of a Neg Am Loan Page and the Loan Comparison Page for more detailed information)

What will happen when rates go up?

A Neg Am has three features that insulate you from rapid increases in interest rates. The first feature is your index. Your index is a 12-month rolling average, then your index moves very slowly. If rates spiked today, it would take 6-12 month before you would see a noticeable increase in your fully indexed rate. With a 12 month rolling average, your fully indexed rate is not based on what is happening today in the economy, but the average of what the economy has been doing over the last year. The second feature is your lifetime cap. No matter how high rates climb, your rate will never be higher than your lifetime cap. The third feature that insulates you from rising rates is that your rate is fixed for a 3 year or 5 year period. Also, if you do not go with a 3-year or 5-year fixed period for some reason, the other option is a 1-year fixed. No matter how high your fully indexed rate increases, your minimum payment on a 1-year fixed will only increase 7.5% per year.

Do you need excellent credit to qualify?