Is negative amortization a good idea to refinance my house?

Ardelia
Here's the scenario: I've been offered by my lender into a 1% neg amortization with a 50K cash out. I do have enough equity to apply for this loan. My monthly payment will be reduced into half compared to my current rate. But the downside of neg am is at the end of every year, they will add an additional $3500 to my principal with a 3 year pre-payment penalty, in which I thought it's not that much. I was thinking to buy another investment property using this 50K cash out and get another negative amortization loan on this 2nd property and I can rent it out. I thought this will be a good offer since I can get a cash flow through this rental. The reason I'm refinancing because my current rate was a 1 year arm and it's going to increase to 7.5% soon.

Leonardo
In finance, negative amortization, also known as NegAm, is an amortization method in which the borrower pays back less than the full amount of interest owed to the lender each month. The shorted amount is then added to the total amount owed to the lender. Such a practice would have to be agreed upon before shorting the payment so as to avoid default on payment. Also known as deferred interest or Graduated Payment Mortgage (GPM).All NegAM home loans eventually require full repayment of principal and interest according to the original term of the mortgage and note signed by the borrower. Most loans only allow NegAM to happen for no more than 5 years, and have terms to "Recast" (see below) the payment to a fully amortizing schedule if the borrower allows the principal balance to rise to a pre-specified amount.This loan is written often in high cost areas, because the monthly mortgage payments will be lower than any other type of financing instrument.Negative amortization loans can be high risk loans for inexperienced investors. These loans tend to be safer in a falling rate market and riskier in a rising rate market.Start rates on negative amortization or minimum payment option loans can be as low as 1%. This is the payment rate, not the actual interest rate. The payment rate is used to calculate the minimum payment. Other minimum payment options include 1.95% or more.NegAM loans today are mostly straight Adjustable Rate Mortgages (ARMs), meaning that they are fixed for a certain period and adjust every time that period has elapsed; e.g., One month fixed, adjusting every month. The NegAm loan, like all Adjustable Rate Mortgages, is tied to a specific financial index which is used to determine the interest rate based on the current index and the margin (the markup the lender charges). Most NegAm loans today are tied to the Monthly Treasury Average, in keeping with the monthly adjustments of this loan. There are also Hybrid ARM loans in which there is a period of fixed payments for months or years, followed by an increased change cycle, such as six months fixed, then monthly adjustable.The Graduated Payment Mortgage is a "fixed rate" NegAm loan, but since the payment increases over time, it has aspects of the ARM loan until amortizing payments are required.The most notable differences between the Traditional Payment Option Arm and the Hybrid Payment Option Arm are in the start rate also known as the "minimum payment" rate. On a Tradiitional Payment Option Arm the minimum payment is based on a principal and interest calculation of 1%-2.5% on average.The start rate on a Hybrid Payment Option Arm are higher yet still extremely competitive payment wise.On a Hybrid Payment Option Arm the minimum payment is derived using the "interest only" calculation of the start rate. The start rate on the Hybrid Payment Option arm typically is calculated by taking the Fully Indexed Rate (Actual Note Rate) then subtracting 3% which will give you that start rate.Example: 7.5% fully indexed rate - 3% = 4.5% (4.5% would be the start rate on a Hybrid Pay Option Arm)This guideline can vary between lenders.Alias's the Payment Option Arm loans are known by:* Negative Amortizing Loan (Neg Am) * Pick - A - Pay * Deferred Interest Option Loan (This is the way this loan was introduced to the mortgage industry when first created)

Bennett
you are barking up a tree which will get you in serious soup...don't sacrifice your home unless you have someone else you plan yo live with when times are hard. rental properties cost money when they are vacant, when things break and when people have to be evicted. think of it this way...about 7 mos rent will have to pay the mortgage the other 5 mos collected will go towards vacancy and repairs. you will be sorry...don't play!