What is the truth about 1.5% interest rates? Is it a good or bad thing?

House on mortgage

Q. What is the truth about 1.5% interest rates? Is it a good or bad thing? Help me do the right thing.

A. The "1.5% interest rates" being advertised are incredibly deceptive because 1.5% isn't the real interest rate, it's the rate used to calculate the minimum payment for what's called an option adjustable-rate mortgage or option ARM.

Option ARMs are the most dangerous types of home mortgages out there. Each month they offer borrowers three or four choices on how much to pay off:

You can pay:

  • lnterest and principal, just like a 30-year or 15-year fixed-rate loan.
  • Just the full interest cost and none of the principal. This will be calculated based on the loan's real interest rate and it will be much more than 1.5%.
  • A minimum payment that is based on a rate of 1.5%, which does not cover the full interest charge much less repay any of the principal.

That's what gets you into trouble. The interest you're not paying is added to the principal. So every month you make the minimum payment, you're falling further into debt. It is not uncommon for some borrowers to be adding $1,000 or more to what they owe.

Amazing as it may seem, some lenders are promoting their 1.5% mortgages as "Negative Amortization Loans," like that's a good thing. They're just counting on consumers not understanding what that means. Obviously, you can't keep adding to your debt forever.

Some option ARMS periodically require borrowers to catch up on all unpaid interest as well as any interest that has accrued on that interest with a type of balloon payment.

Others have "principal caps." If your debt reaches 110% of what you originally borrowed, the minimum and interest-only options disappear and you have to start paying all of the interest and part of the principal every month. You can imagine what happens to your payments then.

Tens of thousands of borrowers are in financial trouble because of these loans. There isn't a financial expert we've seen who thinks they're a good idea.

"No one should be pushing negative-amortization mortgages ever," Will Ogburn, executive director of the National Consumer Law Center in Boston, recently told AOL. "And to do it deceptively by highlighting a 1% interest rate is a huge scam."

This is not a good choice for you or anyone else. Please ask your lender to provide you with other alternatives, such as a fixed-rate mortgage or a traditional three-year adjustable-rate mortgage.

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