DEAR BOB: Several times you recently mentioned negative amortization home mortgages. What does that mean? Is it good or bad? –Myron H.
DEAR MYRON: A negative amortization home mortgage is an adjustable-rate mortgage (ARM). The borrower’s monthly payment remains fixed for a specific time, such as one year, three years, or even longer. Such loans can be a big help to home buyers because their monthly mortgage payments won’t increase for the agreed period.
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However, because it is an ARM, the interest rate adjusts periodically, such as monthly, quarterly, semi-annually or annually. When the interest rate goes up, but the monthly payment stays fixed, the unpaid interest is added to the mortgage’s principal balance.
In other words, instead of the mortgage balance amortizing over the 30-year mortgage life, the balance amortizes “negatively” by increasing.
That’s all right if the market value of the home is appreciating. However, if the home’s value doesn’t go up as fast as the “negative am” mortgage balance increases, the homeowner isn’t building any equity. The result is the “negative am” borrower will usually owe more on the mortgage than its original balance.
To answer your second question, I think negative amortization home loans are bad for most borrowers. However, if the market value of the home appreciates as fast as the “negative am” increases the mortgage balance, then it’s not so bad.
IN A SLOW HOME SALE MARKET, WHY NOT INCREASE COMMISSION?
DEAR BOB: I enjoyed your recent article about how a home seller’s cutting the agent’s sales commission can backfire if local buyer’s agents won’t show the reduced commission listing to their prospective buyers. It seems to me buyer’s agents need a greater, not lesser, incentive to sell homes in a slow buyer’s market. If the local “going rate” for home sales commissions is 6 percent, why shouldn’t the seller insist the listing agent get 2 percent and the buyer’s agent get 4 percent? –Brett D.
DEAR BRETT: That seems like a good suggestion. However, if the listing agent will only receive a 2 percent commission, instead of the customary 3 percent, that isn’t much incentive for the listing agent to work hard to market that listing.
Fortunately, as home sales prices have risen dramatically in recent years, the dollar amounts of sales commissions have also grown substantially. Although the commission percentages are important to real estate agents, what really matters is the dollars the agents put in their pockets when listings sell.
WHO IS RESPONSIBLE FOR DEFECTIVE G.F.I. KITCHEN PLUGS?
DEAR BOB: Less than a year ago, we bought an older house. In our accepted purchase offer, we specified the kitchen be brought up to current code by installing GFI (ground fault interrupt) outlets. We since discovered the GFI plugs were installed, but never properly grounded. Do we have any recourse against our buyer’s agent, listing agent, the seller, or the electric firm hired by the seller? –Jeff DeK.
DEAR JEFF: Your best recourse is against the licensed electrician who installed the GFI outlets. He should complete the work at no charge to you. If he refuses to do so, you should report the matter to the state contractor’s license board for discipline.
If you have to hire another electrician, I would first obtain a written bid and submit it to the seller for payment in advance. If he or she refuses to pay, I would have the work done and then take the seller to the local Small Claims Court for compensation.
The new Robert Bruss special report, “Pros and Cons of Today’s Five Best Real Estate Profit Opportunities,” is now available for $5 from Robert Bruss, 251 Park Road, Burlingame, CA 94010 or by credit card at 1-800-736-1736 or instant Internet delivery at www.BobBruss.com. Questions for this column are welcome at either address.
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