Benefits of the Option Adjustable Rate Mortgage
For borrowers whose income fluctuates, this loan provides the "option" of making a minimal payment in months of low income and the ability to catch up on the negative amortization during months of higher income. For highly disciplined borrowers the option loan can be a boon to monthly budgeting (but so can having a savings account to fall back on and replenish). This loan can also work well for those who receive large annual bonuses... or perhaps someone who is working on a screenplay or has reason to believe that there is a sizable sum of income coming soon.
So what went wrong? Perhaps too many borrowers were "sucked into" these loans without a plan in place to make up the shortfall in their payments. Maybe, they only had their eye on their monthly payment... which in many instances was less than equivalent rental housing.
So what went wrong? Perhaps too many borrowers were "sucked into" these loans without a plan in place to make up the shortfall in their payments. Maybe, they only had their eye on their monthly payment... which in many instances was less than equivalent rental housing.
Posted by Phyllis Harb at 9/25/2007 9:42 AM 
Categories: All about Money, Interest Rates, Lenders, A Buyer's Perspective
Categories: All about Money, Interest Rates, Lenders, A Buyer's Perspective
You are correct, Phyllis. Handled properly, an "option ARM", or adjustable with potential negative amortization, can be a good tool for the smart investor. However, those loans became very enticing to new buyers, since 1% is just too good to pass up.
Unfortunately, many borrowers and lenders used this type of loan as the ONLY way to get into a home when there was no realistic way for the buyer to repay at a fixed rate -even in the low 5% range. With discipline, one can stay ahead of the negative amortization, but some habits are hard to break. As rates started to climb to the high 7% level, it became the borrower's only choice to continue to make that minimum, or negative, payment. In doing so, the amount of negative amortization can spiral out of control and their original loan balance grows until the lender "recasts" the loan and requires the borrower to begin paying down the inflated loan balance. For some, that option has become impossible.
Sure, had rates not gone up and values not declined, this may have worked out well for all. However, due to risky loans like this, there are now widespread consequences for the lenders who are foreclosing in a down market, the homeowners who took those loans and cannot keep up with the quantum leap in payments, and the values in the community as a whole.
It is wise to choose a Realtor who understands financing options well and who will align you with a lender who will truly look after your financial well-being.
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