The Truth about Payment Option ARMS
Option ARMS - Good or Bad?
Payment Option ARMs:
They come in 3 different forms, and are marketed under many different names.
- "Debt Buster"
- "The Cash Maximizer"
- "Easy Pay"
- "4 Pay"
It doesn't matter if they adjust each month,
It doesn't matter if they are fixed for 5 or 10 years,
It doesn't matter if they are fixed for 30 years,
The style, the index, the margin, the lender, they all don't matter!
Payment Option ARM's have gotten a pretty bad rap lately.
But here's the truth ...
They are not bad loans!
The problem is that they have been sold to all the wrong people for all the wrong reasons.
- The loan is perfect for someone who wants to refinance or sell within 5 years of placing the loan.
- It's perfect for someone who has taken the extra money they would have spent on payments and used it to significantly upgrade their home.
- It's perfect for someone who has taken the extra money they would have spent on payments and used it to invest in high quality stocks or bonds.
If you are not one of the 3 listed above you may be in for a rude awakening.
Not only is your loan going to adjust...
Your minimum payment may double or triple in the near future!
That's your Minimum Payment!
Can you handle triple your minimum payment each month?
This has nothing to do with rising interest rates.
Nothing to do with interest rate or payment caps.
This has nothing to do with your credit score.
This has nothing to do with housing bubbles.
Nothing to do with your payment history
And the worst part?
You'll have nothing to say about it!
6 Things You Need To Know:
- Your loan has a Recast Percentage (typically 110%)
- Your loan has a Recast Period (typically 5 years)
- Your loan has Rate Adjustment and Payment Caps (limits)
- When your loan hits either of the Recast limits it doesn't matter what caps you have, your minimum payments will double or triple.
- Some lenders have tiered declining prepayment penalty systems (that's a good thing)
- Your Lender doesn't want you to know this information!
Here's a scenario of a typical $400,000 loan,
It was scheduled to recast in 5 years,
It actually recasts in 39 months!
When it recasts the minimum payments change.
The minimum payment went from a "reasonable" $1,487
To $4,096 in one month!
That's a 275 % change in payment!
Two Hundred Seventy Five Percent!
Here's what we know:
- You are not locked into riding this loan out.
- In the next 24 months 3 trillion dollars in ARMs will become due.
- 75% of people with your type of loan make the minimum payment each month.
- When they hit the recast period, they will go into foreclosure.
- When they go into foreclosure, they'll drag housing values down.
- When home values go down you lose equity.
- When you lose equity, you lose financing options.
- Many people will then not be able to refinance.
- This will cascade into more foreclosures
Wouldn't it be better to be in a fixed rate loan before this happens?
We think so too!
- Last edited October 12 2012
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