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Long Fuse Mortgage Bomb

A Canadian university professor published a study that indicated borrowers taking on a Canadian variable rate mortgage saved money in interest costs compared to a traditional fixed rate mortgage. It appears the concept of averaging interest rates worked out in favour of the borrowers. In the USA variable rate mortgages are known as adjustable rate mortgages (ARM). The problem with variable rate mortgages/adjustable rate mortgages is that unless the borrower has the capability of continuously monitoring the loan or mortgage via a continuously changing amortization schedule the mathematics can become confusing and complicated.

For example, perhaps if Mr Ripplinger had been given an amortization schedule upon signing his mortgage contract he would have been better prepared for reality 5 years down the road. An amortization schedule would have alerted Joe to the fact that on his 52nd payment of $565 per month he would be at the 120% cutoff point in his negative amortization schedule. An amortization schedule would have also driven home the fact that if he wanted to pay off the mortgage it would require $1300 per month payments for 30 years. The monthly interest alone on his very first payment was $1166.33 and GROWING each month and being added to the outstanding balance! This was a death spiral scenario. Maybe he thought he was going to win the lottery? Lenders in the USA giving ARMs, (that default to negative amortization schedules) to borrowers are actually giving them the tools to blow their brains out, financially speaking. Pun intended. Borrower beware!



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