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NBR | Risks of Negative Amortization Loans | PBS PBS Airdate: April 21, 2010Nightly Business Report profiles a homeowner who was surprised by risk factors of a negative amortization mortgage loan. For more information visit: GHARIB: It's everyone's worst nightmare -- you make what you think is a sound financial decision and it turns out to be a huge problem. Learning to make better decisions and avoiding costly mistakes is the motivation behind a new monthly series that we're kicking off tonight. We call it "Money Profiles" and it's produced in association with the human services coalition of Miami-Dade, Florida. Tonight, Julia Yarbough profiles a couple that ended up deeply in debt through a home refinancing.JULIA YARBOUGH, NIGHTLY BUSINESS REPORT CORRESPONDENT: This story starts with a house worth almost $1 million, owned free-and-clear by educator Dr. Mary Louise Cole and her husband, Robert Wood, a retired IBM executive. Now in their 70s, this south Florida couple once lived the good life, but all of that changed when a mortgage broker urged them to refinance their home and offered them a mortgage from a large national bank. It seemed amazing, a loan with an interest rate of just 2.5 percent. The broker urged them to use that money to invest in income-producing real estate, saying:MARY LOUISE COLE, EDUCATOR: Why would you sit on a house that has no mortgage on it? Your money isn't going to work for you. Put your money to work for you.YARBOUGH: So the couple took out the mortgage and used some of the proceeds to buy three town homes with plans to rent them and earn a profit. But then the unexpected happened.COLE: For some reason, the balance on our mortgage started going up, so our mortgage payment started to go up.YARBOUGH: The reason, the couple had taken out a negative amortization or NA loan. A traditional mortgage amortizes, meaning the loan balance declines over time. But with an NA mortgage, the loan balance grows. That's because while it starts out with low teaser payments, it's actually charging a higher interest rate. The difference is added to the loan balance, as Greg McBride of explains.GREG MCBRIDE, SENIOR FINANCIAL ANALYST, BANKRATE.COM: The unpaid interest that you didn't pay that month gets added to the balance, which means next month you have an even larger balance and this problem can snowball.YARBOUGH: That's what happened with the Wood's loan. As its balance grew, their mortgage payments were recalculated, going from just over $1,900 to more than $4,000 a month and eating up their rental profits. The couple says they were never told how the NA loan really worked. And Carolyn Warren, a former mortgage broker, isn't surprised.CAROLYN WARREN, FORMER MORTGAGE BROKER: There was so much greed when these loans were being marketed to people. And there was a lot of pressure on loan officers from higher ups.YARBOUGH: What makes Dr. Cole's situation even more disturbing and ironic, is that this woman has spent her entire life, her career, helping others. Now she's facing an uncertain financial future because she trusted someone who claimed his low interest rate mortgage program could help her. As founder and director of Baypoint Schools, Cole helps troubled youngsters turn their lives around. Now, she needs help, with her properties in danger of foreclosure. So what can you do to avoid her situation? First, if you're thinking about taking out a mortgage, watch out for negative amortization.WARREN: On the new Federally designated good faith estimate on the first page, there's a question right up front: even if my payment is made on time every month, can my balance go up? And if that box is checked yes, that is a red flag for you.YARBOUGH: And before signing up with a mortgage broker, check with the state to be sure that he or she is licensed and in good standing.COLE: Between the two of us, we should have known better.YARBOUGH: Julia Yarbough, NIGHTLY BUSINESS REPORT, Cutler Bay, Florida.
Length: 04:10


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