I have seen a variety of these Flexpay (sometimes called by something else) loans around and had a few questions. I know the negatives people usually bring up about these programs is when negative amortization comes into play. I am not worried about that though because I would never be in a situation where I would be paying less than the principal, and I’m sure I would rarely make an interest only payment, if ever (unless some random major catastrophe occurs). I saw on some website (IndyMac Bank) that a $300,000 loan would be approximately $950/month, a $500,000 would be around $1,650 and a $500,000 would be somewhere around $2400. I will be making $55,000 a year starting in August and have a 740 mid score. I am 22 so my credit history only goes back about 4 years. My only debt is $16,000 in student loans, and I have about a total of $300 of monthly debt that will show up on my credit report including my student loans and the amount of monthly debt i carry on my credit cards. I’ve heard most banks like the payment to be no more than 50% of your total monthly gross income. Since the $500,000 loan would be approximately $1,650 which would be about 36% of my monthly gross income, what we be the chances of me qualifying for this loan. I know it doesn’t matter in deciding whether I would qualify for the loan or not, but I would technically only be paying half of that since my friend would be living with me. I am also looking into ARMs as well because since I am young and I don’t see myself staying there for more than 3-5 years. I figured this would be the best way to go because it would enable me to buy more house for the money, and the area (Jersey City/Hoboken, NJ) is appreciating at about 25-30% annually, so I would be able to take advantage of that. I have a friend who’s father works at Countrywide and he is currently in the same situation as I am and will be making the same amount of money except he has a 680 mid-score and his father was able to qualify him for a place for $340,000 with a 3/1 ARM. I am just inquiring on this matter because Countrywide does not offer a Flexpay program (1.25%/1.95%) and if I didn’t qualify for this I would be going through his father and would most likely use the same program. I figure that since I would be saving approximately 12k a year, I would be better off buying a more expensive property that would appreciate at a great rate, than leaving my money in the bank to collect 2-3%. I would appreciate any help, opinions, or suggestions that any one has.
I am not sure you totally understand this product.
You say you understand the negative amortization but would never have to worry about it because you would never pay less than the principle???
However, the approximate $950 for a $300,000 or $1650 for a $500,000 you quote, is for the “Minimum” payment. The interest only payment for $300K would be closer to $1125 and for $500K about $1850.
A fully amortized 30 year payment (using 4.5%) would be about $1520 for $300K and $2533 for $500K.
That would hit your debt ratio pretty hard. You could probably qualify for a home in the lower range of your example, but I believe the $500K would be too much.
By the way, Countrywide does have a flex pay program.
It’s called their PayOption Arm.
You will not be qualifying at the minimum payment amount. Figure that any bank will qualify you for this type of loan based on the true principal and interest payment. However, I think your theory for the way you are planning on using this type of product, is worth looking at but maybe on something a little less expensive. Just remember, there are no guarantees in life and the property also has the risk of going down in value. You are young so taking this type of risk may be worth it for you. Good luck.
Thanx guys, I thought I was misunderstanding it.
The banks count on you using this mortgage improperly. It is therefore necessary to understand the mortgage’s options, why they are in place, and how to use them to YOUR advantage.
The key to this loan is understanding the benefits of the minimum payment and having the mindset to take advantage of it!
If you are able to qualify for this type of loan, it would be advisable to take it. The best way to use this loan is through the minimum payment with the other options as fail-safe mechanisms.
Sam,
I thought that if you only make the minimum payment negative amortization comes into play, and to my understanding, has a negative impact on your FICO score. I can’t seem to grasp what makes this so bad other than that if the loan amount increases, your debt/income ratio would increase and lower your score. So why would it be beneficial for me to take advantage of the minimum payment option? What are the other issues involved? Thanks.
For the NJ area First Franklin has a a 1% flex play loan…Ive had some dealings with IndyMac and they are by fay the quickest to close.
Hello,
mybe I can help? I just closed on two option arm loans (flex pay, pick a payment, what ever they are calling it!) my first loan was for 143k and the other for 341k. They work like this: first the payment the lenders are quoting you on is there inital interist rate, pay no attion to that rate!! its a sells scam to get you in the door. your interest rate will be the margen + the index. the payment is fixed for a set time, the interest rate is adjustable. So if the min. payment dose not cover all the interest, it is defered to the princeable. If you just make the min. pay ment and the index gose up you could owe more than the house is worth!! up to 120% LTV then the loan will change to a fully amortized for the remander of the loan.
when shopping around for loans check the margen, what the loan index is based on, and the cap (the highest the interest can rise). the margen is what the lender is charging you for the loan, and it is fixed for the life of the loan.(2 to 4% is average) the index is what the lender is charged for the money. Check out this link at bank rate it has all the info you will ever need!!!!
P.S. the best loan I could find was 2.2% margen, non occupyed, no doc. from Washington Mutual no other lender could even come close!!
First and foremost you must understand that I am a financial strategist – I find ways to turn negatives into positives. I don’t look at this as just a mortgage!
My clients no longer look at this as getting a mortgage. They see this as just one of the vehicles available to them to get to where they want to in life.
I’m unaware of any issues here regarding credit. I do not work for the credit reporting agencies. Given the situation that the minimum payment option is made available to you by the lending institution, I cannot fathom why it would affect you negatively to accept that option. But, even if it did, the impact should be negligible.
If the issue is negative amortization, the way to defeat that is to make one extra minimum payment per year, thus making this a neg-am only if you want it to be. Do not confuse this neg-am with what you get with your credit card purchases, which is the biggest scam of all – yet the public accepts this every day.
The key to the minimum payment is not to squander the monthly savings. There are more options available to you to potentially grow that savings thus earning a rate of return on a portion of your mortgage payment. YOU would control this – not the bank!
So if I make one extra payment a year, it will prevent negative amortization? Is that like basically taking the amount of 1 minimum payment and applying it to the principal?
That’s the general idea.