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Sales pitch all smoke and mirrors

Guest perspective: Negatively amortized loans add up to big profits for banks

Editor's note: Steven Krystofiak offers an insider's take on what's been unfolding in the subprime mortgage industry. Read Krystofiak's previous articles, "What is a subprime loan? It depends on whom you ask"; "High-risk loans enable buyers to obtain, not afford homes"; and "Why home-ownership shortcuts will lead to longer recovery.") Many mortgage companies have consumers concentrate on the glitz and glamour of low monthly payments based on "option interest rates" of 1 percent or 1.95 percent, much like a magician trying to pull off a disappearing trick on stage. These rates are used to calculate monthly payment, but while the consumer makes these low payments he or she is being charged something else -- a higher rate. The magician comes out and reveals a trick: In reality, and oftentimes completely unknown to the consumer, the monthly payment being charged is derived from an interest rate usually between 7.5-9 percent. This rate can be 2-3 percent higher than what that same consume...

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