The 1.25% loan is actually an adjustable loan with some complicated and potentially useful features. However it is being marketed as a loan for everyone, which it is NOT.
Essentially, the monthly adjustable is a loan which adjusts monthly* based on a slow moving index**. Added to this index is a margin that determines the rate.
The payment will be set by the introductary rate, in this case, 1.25%. There is an annual cap on the payment of 7.5% of the prior year's payment. So, a minimum payment of $1000 in year one can only increase to $1075 in year two. The cap applies for 5 years, the payment is reset, and the cap (up & down) applies to the next 5 years. After each 5 year period, the payment will adjust (increase or decrease) to the level necessary to pay off the loan in the remaining term.
In the meantime, the actual rate is determined by the index and margin. If the index is at 3.25 and the margin is 2.75, the rate will be 6.00%.
You now have a choice on what you pay, the minimum payment, or the actual interest being charged. If the interest charged is greater than the payment you make, that amount will be added to the loan balance. This is called negative amortization, the loan balance increases.
Additional payment options may show the payment necessary to amortize the loan over the remaining term.
There is a maximum amount that can be deferred, usually 10% of the original loan amount. Also, title charges and mortgage tax (in NY) will be based on the maximum potential loan amount.
This is a great loan for people with seasonal, bonus, or other types of varying income. An example would be a wall street trader with a minimum salary but a big bonus at the end of the year. He/she would pay the minimum payment until bonus time when the deferred interest would be paid. For salaried people with minimal salary increases on the horizon, and streching to make the minimum payment, this would not be a good product.
* there are variations with 3 & 6 month adjustments
** Indices:MTA - 12 month average of the treasury, COFI - Cost of funds index, or LIBOR.
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