"Pick and Pay"……recipe for disaster or not?

Hi folks. Today, I'm posting to gather some information. Yesterday I was talking with my friendly Wachovia loan officer and she was explaining to me a new product that they have. They are offering a product called a "pick and pay" mortgage.

Have you heard of this before? From what I understand it's an 80% LTV mortgage that can be used for refinancing or for a purchase. Since it's not a Fannie Mae product they can do stated income loans with a fairly low credit score and can do full doc loans with credit scores in the low 500s.

Here's the deal. This loan allows you to "pick and pay" a payment. Every month when you get your payment coupon you can choose to pay as follows:

  • P&I payment based on a 30 year fixed.
  • P&I payment based on a 15 year fixed.
  • Interest only payment.
  • 50% of the 30 year fixed payment(negative amortization) for two years max.

Now folks, I can see where this loan could be advantageous for folks in our business or other occupations where income varies month to month. I know there are months where I would welcome making a 50% payment.

But and it's a big but, how would this loan work for someone with a low 500 credit score who has already proven they don't pay their bills on time? How tempting would it be to make 50% payments for two years straight and end up eating up all of their equity? Especially now that values are declining in some markets. After two years they could very well end up owing more than the property is worth and of course now the payment, they have gotten used to paying, would double!

Am I missing something here or is this "pick and pay" mortgage a recipe for disaster? So, I'm curious, have you heard of this program? And if so, do you have some information that I'm missing? Pros? Cons? Inquiring minds need to know.

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