| There are now many lenders offering minimum | | | | Minimum payment loans typically offer the minimum |
| payment options. For the borrower it is critical to | | | | payment option for the first five years of the loan. |
| understand how these loans work before they sign up | | | | Each year the minimum payment is fixed, but is |
| for them. Here are some items to consider: | | | | increased slightly each year for the first five years. |
| 1. Different payment level options | | | | This is an example, and you should check carefully the |
| The basic feature of these types of loans is that a | | | | options for the loan you are looking at. |
| customer has a choice in the amount of payments | | | | 5. Recast of the loan |
| they make for an initial period. This can give you | | | | Some loans require that the loan be "reset" under |
| several different levels of payments you can make | | | | certain circumstances. If the loan increases over time |
| each month. For example, you can pay the loan at the | | | | to a preset amount, then the loan no longer offers a |
| 30 year loan level, at the interest-only level, or even | | | | minimum payment option. It is recast. An example of a |
| less than interest only. | | | | triggering event is if the loan value is 110% of the value |
| 2. Minimum payment term | | | | of the property. If minimum payments are constantly |
| The minimum payment in the beginning can be less | | | | made, the loan balance increases over time. |
| than interest-only. Anytime you choose to make this | | | | 6. Lifetime cap |
| payment, the difference between your payment and | | | | The loan may have a lifetime interest-rate cap. This |
| the interest-only payment is added to your principal. For | | | | can be 9.99% or another level, but it may offer some |
| example, if the interest-only payment is $2,000 and the | | | | protection to a borrower from large increases in the |
| minimum payment is $1,700, if you choose to make the | | | | interest rate. |
| minimum payment then $300 will be added to your | | | | 7. Downside risks |
| principal ($2,000-$1,700-$300). | | | | The loan may allow some borrowers to decrease |
| 3. Indexes | | | | their equity over time. This depends on market value |
| The interest rate on many of these types of loans is | | | | trends, interest rates, and the payment choices of the |
| based on an index. This index can change on a | | | | borrower. |
| monthly basis. The interest rate is the combination of | | | | 8. Prepayment penalty |
| the index plus a fixed margin. As the index changes, | | | | These loans can come with a prepayment penalty. It is |
| so does the interest rate. These indexes include | | | | important to know this for your own planning purposes. |
| LIBOR, COSI, CODI, and others. These indexes change | | | | Prepayment penalties can work in two ways. They |
| at different rates. Sometimes the indexes can be the | | | | are "hard" or "soft". A hard prepayment penalty is a |
| ongoing average of the past 12 months of a specific | | | | prepayment penalty that is triggered whether you sell |
| interest rate measure. Since a rolling average is being | | | | the property or refinance. A soft prepayment is |
| used, changes in the index occur more slowly over | | | | triggered when you refinance the property, but not |
| time. | | | | when you sell it. A soft prepayment penalty can give |
| 4. Escalating payments | | | | you a little more flexibility. |