• A $100,000 mortgage (30yrs) with a 7.5% paycap

Step = 2% Required increase in mortgage payment = $151 (Rise without payment cap) Cap = 7.5% (of mortgage payment) Maximum increase in mortgage payment =$66 (Saves $85)

• A lender who offers a monthly payment cap as an inducement to the borrower, often feels justified in asking for more restrictive terms in other areas such as a prepayment penalty -perhaps as much as 6mos of interest!

• A montly payment cap just restricts the amount you immediately pay, the portion that you do not pay gets added to the mortgage at some point which may lead to “Negative Amortization”.

• “Negative Amortization” means that instead of the amount you owe going down, it goes up! Each month, instead of paying off some of your loan, you add to it! You end up owing more than you originally borrowed and/or having a longer borrowing period. You also end up paying interest on interest! It usually comes about because your payments are capped and the cap is lower than the interest rate increases. Federal lender regulations often prohibit negative amortization from increasing beyond 125% of the original mortgage balance. If your original balance was $100,000 the maximum negative amortization can increase the mortgage is to $125,000.

• Lenders often argue that the bad effects of negative amortization will be offset by housing price increases, but this gives the equity increase benefit to the lender instead of to the borrower. You don't get more equity, you get more loan!

• On $100,000 30 year mortgage:% ...................................................{..........Monthly Payment with...........}%

Year:….Interest Rate:………7% Cap:…….7.5% Cap:…..10% Cap:…..No Cap: % 1............6%..............................$514...............$514................$514..................$514 % 2…………7%…………………………$540……………$552…………….$565………………$572 % 3............7.5%............................$567...............$594................$622..................$630 % 4…………8%…………………………$595……………$638…………….$684………………$689 % 5............9%..............................$625...............$686................$753..................$748 % 6…………9%…………………………$625……………$738…………….$753………………$748 % 10...........9%..............................$797...............$800................$753..................$748 % 15………..9%…………………………$1018…………..$800…………….$753………………$748 % 20...........9%..............................$1112..............$800................$753..................$748 % 25………..9%…………………………$1112…………..$800…………….$753………………$748 % 30...........9%..............................$1112..............$800................$753..................$748 %

• Notice that the lower the monthly payment cap, the lower the monthly payments initially. But, in the long run, the lower the monthly payment cap, the higher the monthly payments as the lender plays catch-up trying to recoup interest not received because of the payment cap.

• When a mortgage has both an interest rate cap and a monthly payment cap, you automatically should suspect that the interest rate cap is set higher than the monthly payment cap and that negative amortization could take place -otherwise no monthly payment cap would be necessary.