RAYB, in financial terms, the neg am loan (IMO) is the worst loan ever invented for the average borrower, but the best ever for the lender and salesperson.
You are absolutely correct that it CAN serve a purpose for high net worth, savvy borrowers. As with many things, it’s been abused. Most people don’t know that neg am loans have been around about 25 years, started by World Savings as a portfolio product.
About 5 years ago, the mass rollout started, of offering the largest commission of ANY loan product to the salesperson.
A neg am loan consists of an index PLUS a margin.
The higher the margin you put the borrower into, the higher your commission was. Even a “good neg am” loan was bad.
You may heve qualified for a fixed 6% interest only loan.
The true rate on your “good neg am” was 8%, a 33% premium.
A “bad neg am” could have you at 9%, a 50% premium.
The tradeoff was the option of a low teaser rate.
When you made lowest payment #1, whatever you didn’t pay was added to your loan balance, so you were paying interest on top of deferred interest.
For those that don’t understand how they work, your lowest payment option might have been $1200, with a full interest only payment (at 8%) of $2300… When you only paid $1200, you would add $1100 to your loan balance.
Had you opted for the FULL interest only loan at 6%, your payment would have been $1725 (instead of $1200) and your loan balance wouldn’t grow.
So the cost of NOT paying the extra $525 a month, was $1100,(an extra $575)
Great financial decision?? Only for the lender..
Add insult to injury, they usually come with 3 year prepay penalty, a cash cost of 6 months FULL interest, IF you realize how bad the loan is.
Try and find ONE person of the thousands that have these loans that was given this explanation.
Yes, it “could” serve a purpose, but not to the masses.
My apologies if you already knew this, but at least one person reading will learn something.
The saddest thing is that many salespeople couldn’t explain the above because they truly didn’t understand what they were selling. They only understood the huge commissions, and the borrower didn’t know what to ask, they only saw the lowest payment option.
I once attended a World Savings Neg Am seminar just to watch the presentation. They wondered why I hadn’t ever originated one. The presentation was poor at best, and I didn’t want to embarrass the host. What I enjoyed the most was them saying that they do not like to use NEGATIVE AMORTIZATION, they prefer “Deferred Interest” (sounds better??) I saw glazed looks on faces all over the room, and there weren’t any intelligent questions asked.
The result is that most people have made the largest financial situation of their life guided by an uninformed knucklehead, with a crappy credit score, negative net worth, no mortgage, and very little financial background (if any)
There are still consumers that think they have a 2% loan.
There’s a sucker born every minute, and scammer will find them.
