Difficulties Doing a Home Equity Loan Behind a Negative Amortization Mortgage (Payment Option Loans)

If you need a home equity loan to refinance debt and currently have a negative amortization loan as your first mortgage, you may find the neg am can hold you hostage. It can be very difficult to get a second mortgage behind neg am loans. In fact, very few home equity lenders will go behind a negative amortization first. Its just too risky.

Home equity lending underwriters calculate the 1st mortgage balance by gross up balance, 115% or 125% depending on the mortgage note. With this in mind, a 100% home equity loan behind a negative amortization 1st mortgage that has been losing equity is a dangerous situation. Depending on your credit score, you may need to refinance your negative amortization 1st and then get a new home equity loan. In fact, even if you cant get an equity loan yet, you may want to refinance anyway.

Countrywide Home Loans recently stated that 75 percent of their payment option borrowers choose the one with the cheapest mortgage payment, the negative-amortization option and are worried enough that they recently sent out a letter to each of these borrowers. Angelo Mozilo, Countrywides chairman and chief executive hopes that the borrowers that are about to get into financial difficulties will refinance.

Dean Vigfusson, SVP Retail Lending for Arizona State CU in Phoenix notes of Neg Am loans "the trend towards using these products to assist people to buy more home than they can afford is disturbing. Ultimately, this could contribute to any downturn certain markets experience in the next 12 to 24 months. For example, a large percentage (50%-plus) of home sales in certain California markets last year were financed with these loans, and this may have a very negative effect on foreclosure rates in those areas and hence, the overall market."

As interest rates rise, now may not be the time to utilize negative amortization loans. Consider whether you may need a second mortgage before you get a payment option mortgage with a 1% start rate or any other product that will ultimately lead to negative amortization. If the balance owed on your house is growing instead of diminishing and creating equity, a cash out second mortgage is an impossibility. Worse, you may find yourself deeper in debt.

Rebecca is a highly regarded free-lance writer and article contributor to the Los Angeles Times. For the updated guidelines for fixed rate 2nd mortgages and interest only lines of credit, please visit the online resources at Home Equity Loan & Mortgage Refinancing. Please visit these additional resource websites: To get a free loan quote for a Payment Option Home Mortgage Loans for people with all types of credit, please check out the special loan offers for lower payments. If you need more loan advice about credit lines, take a look at the flexible programs offered for second mortgage loans with bad credit.

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