Can anyone explain...

Today a friend of mine called me after he received a Customized Mortgage Quote from some company offering a Wholesale Home Lenders Smart Pay Program. It offers to be able to reduce mortgage payments by 50% or more, by offering a lower interest rate than traditional fixed rate loans. This plan is supposed to allow payment options of either full payments (P & I), Interest only, or minimum payments for 5 yrs, then the minimum payment option falls off. It has a pre-pay penalty of 6 mos of interest, I think he said 5 yrs.

Has anyone heard of this? How legit is it? How can they do this? What is the catch?

The catch is that you are rolling the negative amortization (or unpaid principle) back on to your loan balance. So in five years you owe more than you originally borrowed. In a declining market this would be considered a toxic loan because in five years you will owe more than the house is worth. Hope this helps.


Small correction, since the minimum payment option does not pay the full interest due for the interest only option, the unpaid interest is added to the loan balance (not unpaid principal).

So long and short of it is… this plan = bad. I guess he said the loan officer did confirm what you guys have said in that the unpaid principal gets tacked on to the end. After I advised him of this, he challenged the loan officer with this and how homes are not appreciating so it’s a bad move. And was told yes, if homes are not appreciating it doesn’t make sense, but it is a 5 yr loan and he should think that homes will again start to appreciate. “Ok, buddy, I don’t know enough to advise you.” Anyones input? He’s really in a crunch financially and doesn’t want to sell the home (probably couldn’t as homes are sitting over there), doesn’t want to file BK or have a foreclosure. Any one who can help with this, please chime in.

What this loan can do is allow him to operate until something happens to bail him out. That something can be the selling of a property, big bonus from work. But the crux needs to be that when the something happens you don’t have that loan anymore. It can be refinanced or the house gone. It is a holding loan, not an operating loan.

Thanks all. I don’t want to steer him wrong because it sounds like I’ve gotten two different views. Bluemoon are you suggesting it would not be a bad move for the long haul if he gets out of the loan at the 5 yr? The loan officer did suggest instead of him burning that money on trips and cars, he invest it. Sounds good to me, but hey, I’m new to this world and looking to learn from you pros.