an MTA loan, (sing) “More than meets the eye.”

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pic_optimus.jpg

What if I told you could get a $200,000 mortgage at a 1% interest rate, with a minimum monthly payment of $643 per month!? And your payment would only adjust by about $50 per year no matter what the market does! Sound familiar? Too good to be true? (recall mother’s advice: “If it sounds too good to be true . . . it probably is.”)

If you have heard or read this before, most likely they are talking about an MTA loan. Here is why this loan is anything but “Optimus” for your home financing. The loan and monthly payments start out well-and-good but quickly ‘transform’ into something very different. Kind of reminds me of that time when Megatron was leading the Decepticons in their villainous plight to take over . . . (sorry, I have taken the Transformers analogy MUCH too far!! nerd alert!! nerd alert!!)

MTA stands for Monthly Treasury Index. This type of loan (generally named an MTA loan, a Pay-Flex loan or a Pay-Select loan) is a one month adjustable rate mortgage based on the MTA index. The MTA index is an index calculated based on the twelve month average of annual yields on actively traded US Treasury Securities — the Monthly Treasury Average Index. Because this index is an average of the previous twelve months, it is a much slower moving index than all other adjustable rate mortgage indices. For more information on adjustable rate mortgages (ARMs) and how they adjust, check out my previous post.

This loan does in fact have a rate of 1% . . . a “start-rate” of 1%. Based on the example above, the first month’s payment (of principle and interest) would be $643 per month. However, after the introduction period (usually a 1 month or 3 month period), the interest rate adjusts to the “real” interest rate = the MTA index plus a margin. The margin on this type of loan can vary between programs, but for the sake of this post, I’ll use 2.75%. With the MTA index currently sitting at 4.664 (as of September 9th), the “real” or fully-indexed rate would be 7.414%. Ouch! And to make matters worse, unlike most ARMs, this loan usually does not have a cap on adjustment (although it may have a life-time cap of 10% or so). Ouch again!

So what about the payment only going up $50 per year?

Here is where the loan gets even more confusing. The loan is called a “Pay-Flex” loan because it is sold to consumers with the idea that you have the flexibility to make one of four payments. You can make the minimum payment, an interest-only payment, a 30 year amortization payment or a 15 year amortization payment (the last two options are laughable at best). The consumer can select (hence the name “Pay-Select loan”) which option they want to pay. What a friendly loan!?? Just make whichever payment you like, no problem . . . not a problem if you like paying more interest of course.

In the example above, the payment (the minimum payment) will only increase by 7.5% per year. So if the first year’s payment (minimum payment) is $643 per month, the second year’s payment (minimum payment) will be $691. However, because the interest rate has adjusted up, the difference between the minimum monthly payment and the interest for the month . . . read carefully . . . will be added to the loan balance. So, for a $200,000 mortgage balance, now at a rate of 7.414%, the interest for one month would equate to $1,253. The minimum payment would be $592 TOO LOW even to cover the interest on the loan and that amount would be added to the loan balance (called negative amortization). Next month’s interest payment would be calculated on a new loan balance of $200,592. This cycle of adding to the loan balance would continue until the loan value had maxed-out at 115% of the original appraised value.

Bottom line, compared to an intermediate adjustable rate mortgage (a loan that is fixed for a set number of months or years like 3, 5, 7 or 10, and then converting to a 1 year ARM with caps on adjustment), now available — and extremely popular — with an interest-only payment, the usefulness of an MTA loan is pretty slim.

There may be one small argument that would say that because this loan adjusts as the market adjusts, a consumer will reap the benefit of falling interest rates (and a falling MTA index) automatically without the hassle and expense of refinancing, but it would be a pretty tough argument to make. If you looked at the average of the MTA index over the past 10 years (3.973 — which would equal a mortgage rate of 6.73%) and over the past 5 years (2.503, which would equal a mortgage rate of 5.25%), someone might make a mildly convincing argument.

But, if somone made the argument so compelling to you (especially at the beginning of 2004 when the MTA index was at it’s lowest point and the adjusted rate was 3.975%) now that things have transformed for the worse and the rate has gone up to 7.375%, and your interest-payment has gone from $662 per month to $1,229 per month, you might just wish you had a 30 year fixed rate loan at 5.25%.

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10 Responses to “an MTA loan, (sing) “More than meets the eye.””

  1. Mastro Says:

    Hello to whoever made this post. I’d like to talk to you offline (via email or chatroom) about this a little more. I was approached by someone and I own 12 properties, my thought was doing an MTA loan on all 12 and using the money I’d be “saving” to pay off one of the 12 homes and so on. In 5 years I could pay off three of the homes that bring in cashflow of $1200 each. I’m not sure if this would be a good idea or not, does seem a little too good to be true, but would like to talk to someone about it.

    I try and talk to the brokers but can’t trust them as they just want my business.

    -Mastro

  2. hillsidelending Says:

    Masto,

    We can certainly talk more about your situation. You can email me at jpinkerton@hillsidelending.com.

    You can do the same type of cash-flow “savings” with any interest-only loan option — all of which (3/1 ARM interest-only, 5/1 ARM I.O., 7/1 ARM I.O. or 10/1 ARM I.O) have a better interest rate than the MTA option.

    Look forward to hearing from you soon.

    Jeffrey Pinkerton

  3. Edwin Says:

    I bought a new house in my wife’s name only4 month ago. The old house is on an FHA 6%. The payoff amount is $161,000, but I have about $80,000 in equity that I want to put my hands on, in order to invest in more properties.

    I’ve been considering a Neg-Amort loan or an 3/1 ARM loan. 3/1, because I want to take advantage of the tax break if I sell the house within the next 3 years. The equity would be tax free. I want to rent the house and continue gaining equity, but the area where the house is do not hold a higher than $1,300 rent value. If I pull my equity on a refi, or a HELOC my monthly payment would be higher than the prospected rent. That is without taking in consideration any vacant time between tenants. Can you tell me what is my best option? The reason I was going to do the MTA was becuse if the house is rented I can apply all the rent to the monthly payment, but if the house is vacant, or for whatever reason I don’t get to collect rent that month, I can do the minimum payment… Is that smart? Am I getting in deep trouble? Please help!

    Edwin

  4. hillsidelending Says:

    Edwin,

    Thanks for the question. First, you need to check to make sure that the tax-situation that you describe is correct. If you only purchased the home 4 months ago, and you are not going to be living in the house, I don’t think that the sale of the property is going to meet the IRS use and ownership tests for the capital gains exemption — and the sale of the property (because it was not your primary residence for 2 of the last 5 years) will likely be subject to usual capital gains rules.

    Second, it is not a great idea to leverage one house fully (pulling out all the equity) in order to finance another property. Putting a first mortgage against the current property that exceeds an 80% loan to value is likely to incur PMI and the additional expense of a cash-out refinance or (for an equity line) an interest rate floating off of prime rate (currently at 8.25%). You might consider pulling out enough equity on a home equity line of credit to put down 10% on the new property and then look at the numbers from there. Any unused available credit on the credit line could be used to pay the mortgage on the rental property in the event of a vacant property, emergency, etc.

    There is also an issue with most 2nd mortgage lenders where because you have not owned the current home for 1 year, the value used to calculate your available equity will be based on the original sales price, not today’s market value. Once the 12 month window has past, you should be able to use the appraised value of the house in calculating the possible available credit line.

    As far as monthly payment, rent collected and cash-flow go, I would say that if the cost of financing the property (monthly payment) is higher than the rent you are able to collect (based on a 30 year fixed rate loan — maybe based on a 7 year or 10 year interest-only ARM), I would probably go looking for another property.

    Thanks again for the question. I hope this helps.

    Jeffrey

  5. “do you understand . . .” « The Mortgage Blog Says:

    […] I think some consumers have the perception that maybe mortgage brokers have some hidden agenda — like a car salesman (the analogy hurts, it does), in that I might make more commission if I sell a customer an adjustable rate mortgage instead of a 30 year fixed rate mortgage.  As if I were to say (slick hair and bad suit) “What can I do Mr. and Mrs. Smith to get you into a 1 month MTA-loan today?”  Some of the industry’s reputation is likely deserved (bad apples).  I spoke to a past client who had just received a phone call from a telemarketer trying to sell them on a 2nd mortgage.  He has great credit and a good equity position in the house and the telemarketer offered him a second mortgage at 12%!!  After he gasped and told her that the rate was terrible, she immediately changed her quote to 9.75% . . . a few comments later, down to 8.9%.  For perspective, he and I talked about a possible second mortgage at 7.25%.  All that to say, some of the skepticism (and maybe even the car-salesman analogy, ouch again) is probably justified. […]

  6. Finally, the truth about MTA loans. « The Mortgage Blog Says:

    […] there is still a lot of interest about MTA loans.  These loans are usually one-month adjustable rate mortgages based on the MTA index (an index […]

  7. wrkr Says:

    In my honest opinion the MTA LOAN should be disgussed as well as any other potential loan product with your client and let them make the decission.
    CONDEMING A LOAN PRODUCT = FRESHMAN/IGNORANT LOAN OFFICER
    ATTN LOAN OFFICERS … Please understand it’s NOT YOUR DECISSION …
    it’s your clients decission. you simply give them the facts. I have done and continue to do many MTA LOANS as well as 15/30 Year fixed and other ARMS.
    Some major Banks/Lenders have commercials 1 minute saying “stuck in your adjustable mortgage call us and 5 minutes later they run another commercial saying get a $300,000 mortgage with a payment under $1000. a month. Why you ask? I’ll tell you, simply put, some people want an MTA LOAN/ARM and some people want a 30 year fixed.
    Some of my clients have used the money they saved from the monthly payments to make or save more money by opening a business or buying another Home or by simply greatly reducing there credit card balances.
    My advice to anyone looking for a mortgage is find a good Loan Officer and stick with him/her! Don’t beleive the hype!
    Good Luck!

  8. hillsidelending Says:

    Dear wrkr,
    Thanks for the comments . . . I’ll try not to personalize the Freshman/Ignorant Loan officer comment. I guess I would discuss (in disgust) the MTA loan more with my clients if I thought that it was competitive when compared to an intermediate adjustable rate mortgage. There just isn’t much $$ sense that I can find in taking on a rate at 7.5% (even with a minimum monthly payment) when you could save money just like you mention by doing a 7 year or 10 year interest only ARM at a lower rate.

  9. The trouble with “I told you so.” « Says:

    […] 8, 2006 — an MTA loan (sing) “More than meets the eye.”  “The loan and monthly payments start out well-and-good but quickly ‘transform’ into […]

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