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Unformatted text preview: resulting in a new balance of $100,150 after the first month's payment of $600. The second month's calculation would be $100,150 X 9% = $9,013.50 divided by 12 months = $751.13, less the second payment of $600 = $151.13 shortage. This $151.13 shortage would be added to the previous balance of $100,150 to bring the new balance to $100,301.13 and the process would continue with each subsequent monthly payment of $600. As you can see, the negative amortization just continues to increase the size of the loan balance due. Some of the original ARMs contained provisions by which the negative amortization on an 80% LTV loan could produce a loan balance equal to 125% of the original debt. When the loan reached this point, it was obviously equal to the value of the security
Dynasty School (www.dynastySchool.com) 9-13 REAL ESTATE FINANCE
property, and the note then required that the loan be automatically recast, with the introduction of new monthly payments scheduled to fully amortize the loan over the remaining term. The result was that many owners lost their homes through foreclosure; loan provisions had to, and did, change. It is important to note that two changes can take place in connection with an ARM: a change in the interest rate and a change in the monthly payment. One can occur without the other. If changes in the payments are not made concurrently to accommodate the higher interest rates, negative amortization can take place, resulting in a debt increase rather than a decrease. There has been a definite movement by lenders away from granting real estate loans with negative amortization. ADVANTAGES OF ARM
Adjustable rate mortgages and similar instruments have advantages in periods of rapidly changing market conditions. ARMs allow the market rather than the government to regulate interest rate fluctuations. They give the lender mortgage loan incentives, by maintaining an interest rate commensurate with lender's cost of funds. Institutional lenders tend to be wary of long–term, fixed–rate loans during periods of fight money, high interest rates, inflation, recession, or stagfla...
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This note was uploaded on 12/30/2010 for the course SOC 101 taught by Professor Zhung during the Spring '10 term at Punjab Engineering College.
- Spring '10