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Are Option Pay ARMs Risky?
The general consensus about the riskiness of Option Pay mortgage loans is that they are high risk; high risk to both the borrower and the lender. To add even more risk to the loans, consumers and loan officers not only have to understand initial and lifetime caps, various indicies and margins, but also teaser rates, prepayment penalties, negative amortization caps, and moving indices. What we end up with is a risky, popular, and often misunderstood mortgage loan.
Known as an Option Pay mortgage, its an adjustable-rate mortgage that typically allows borrowers to choose one of four different payments each month. From smallest to largest, they are: a minimum monthly payment, an interest-only payment, full principal and interest amortized over 30 years, or full principal and interest over 15 years. Those who choose the interest only payment pay no principal each month, but they pay the full amount of interest due. Those who choose the minimum payment pay no principal and less interest than what accrued on the loan. The unpaid interest is added to the loan balance, resulting in what is known as negative amortization.
While accounting for less than 5% of all loans in 2004, Option Pay ARMs could account for as much 20% - 25% in high cost housing markets specifically those located on the East or West coast. These loans are often being used to buy more house than a borrower could otherwise afford or to offset negative cash flow in a second home or investment property. Used in this fashion, the biggest risk of the mortgage loan is increasing monthly payments. The increasing payments can be caused by several events: rising interest rates, expiration of a teaser rate, and a rising loan balance.
Since the product is often used in high cost housing markets and for investment properties, one could assume that the home buyer understands the overall risk of their housing purchase decision and the risk inherent in the Option Pay ARM. It is up to each individual to understand their acceptable risk level and act accordingly.
Now for the rest of the story....
Many mortgage companies use the introductory low rate as a marketing tactic offering 1.0% or 1.75% mortgage loans with very low reported Annual Percentage Rates (APR) through direct mail, newspapers, and internet advertising. The lower rate, lower payment, and teaser rate are very attractive and borrowers often complete a mortgage application before completely understanding the terms and conditions of the mortgage loan program. By the time the borrower figures out what is going on, they are well into the mortgage application process and often switch to a less risky program with the same lender.
If an Option Pay ARM is not right for you, something will not feel right when you get more information from the lender. If you walk down that path, please make sure you fully understand the risks and financial impacts that you may encounter. If an Option Pay ARM is truly right for you, you will recognize and be financially capable of assuming the risk involved in the ARM and will use the lower payment options for your financial benefit.
And ?please do yourself a favor now. If you?re drawn to Option Pay ARMs, first learn more about Fixed Period ARMs such as the 5/1 which is fixed for 5 Years and then converts to an ARM program. You will enjoy a lower rate for 5 years and the program offers Interest Only and 100% LTV options with no prepayment penalties.
Four Quick Tips on How to Lower Your Mortgage Interest Rate
Lowering your mortgage interest rate
Are you buying a new home? I dont care if its a condo or a house, you will end up spending a lot of money. For most people its going to be the single largest business deal of their life. To keep expenses in check it is extremely important to try and secure the very best mortgage rate possible. There is a number of things you can do to lower your mortgage rate, and right now is an excellent time because of the low interest rates.
Tip number one - let lenders compete
Banks and mortgage brokers are in business to lend you money. If your credit record is in order and you have a steady paycheck coming in you are a prime candidate for a home loan, and banks will bid under each other to offer you a loan. The trick is to let them know you are an informed customer looking for the very best interest rate, and that you are also looking at what other banks have to offer. Dont just go to your regular bank, shop around!
Tip number two - get your interest rate offer in writing
Right, so you have approached several different banks to try and secure a low interest rate for your new home loan. As soon as one of these financial institutions have pre-screened you and are ready to offer you a loan, get them to put the interest rate they will extend to you in writing. With this interest rate locked in, you can now get back to all the other banks you are talking to and tell them: If you cant match a 5.25% interest rate, we have nothing to talk about.
Tip number three - dont compare apples and pears
Remember that the interest rate you get is dependent on a number of things, but the main factor is if you are shooting for a fixed or adjustable rate mortgage (FRM or ARM, as they are called for short). This is in fact one of the first decisions you have to make about your mortgage. Say you decide you are looking for a 3/1 ARM, being fixed at an initial low rate for the first three years and adjusted each year after that. That means that is what you are going to use as a basis for comparison between different lenders. Dont get sidetracked by all the other adjustable mortgage rates or fixed rares on offer, theyll only get you mixed up.
Tip number four - go for the adjustable rate mortgage
First of all, everyone has different needs and no one mortgage type will fit all. Some people really appreciate the security of knowing the exact amount of their mortgage payments for years to come, and that means fixed rate is the best choice for them. With that out of the way, what were looking to find here is the best way to lower the interest rate on your mortgage. And that definitely means adjustable rate. Adjustable rates mortgages are nearly always lower than fixed rates, just take a look at what your local bank will offer you. Over the life of your mortgage that adds up to serious money, and personally Ive always hated paying too much!
Second Mortgage Secrets
Everyone has heard of a 2nd mortgage at least once in their life! However, most people might not understand what a 2nd mortgage really is. A 2nd mortgage is one the more important tools in both commercial and residential real estate, and can raise much-needed funds for home owners.
The reason behind the idea of a 2nd mortgage is fairly simple. It means that you take a loan against the equity in your home ? the value not already loaned to you by your regular mortgage. Thus a 2nd mortgage releases capital to you, and is secured on your property just like your regular mortgage. Most financial institutions will have the ability to give 2nd mortgages from them when you need one. But you are someone that is looking to receive a 2nd mortgage on your property, you should always remember that you have many options about the type to get.
There are many good reasons why a person or couple would take out a 2nd mortgage. These can range from anything like consolidating existing debt to obtain a lower interest rat, or taking a 2nd mortgage in order to take the extra money to pay for something expensive or unexpected. This can be everything from paying for a child?s college or to cover expenses while finding new employment. Common uses of a 2nd mortgage include building renovations, home improvements, buying a car or boat etc.
When taking a 2nd mortgage out on your home or business, you need to remember that the 2nd mortgage is secured on your property and thus if you cannot repay the loan, your property is at risk.
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