Option ARM ? The World?s Most Dangerous Mortgage

Home prices have reached record levels, and in many parts of the country, homes have become nearly unaffordable. Real estate has replaced the tech stocks of the late 1990's as the hot investment, and everyone has sold their stocks and jumped into investment property. Real estate prices have increased at a far greater rate than salaries, and the lending industry has attempted to solve this problem by introducing a tremendous number of mortgage options for borrowers who barely capable of purchasing a home. Most of these loan types feature adjustable interest rates and minimum down payments. One of these, the option ARM, is the most dangerous type of loan ever introduced. Borrowers who are considering an option ARM should be aware that this loan could leave them with a loan that is worth far more than the home it's used to buy and with a loan that he or she cannot afford to pay. The option ARM is not for the squeamish.

So what, exactly, is an option ARM? An option ARM is a mortgage with an adjustable interest rate that typically gives the borrower four different payment choices each month. The first choice is based on a 30-year amortization table; the second on a 15-year amortization table. These would correspond to payments for adjustable-rate 30 and 15 year mortgages, respectively. The third choice is an interest-only payment, which pays the interest that accrues during the month but pays nothing towards reducing the loan amount. The fourth choice, the one that makes this loan so dangerous, is called the "minimum payment." The minimum payment is calculated upon the first month's interest rate, which is usually a very low "teaser" rate that can be as low as 1-2%. Most borrowers with an option ARM opt to pay the minimum payment each month, and that's where the trouble comes in.

The loan carries and adjustable interest rate, and this rate can adjust as often as every month. If the borrower is paying only the minimum payment, then he or she isn't even paying enough to cover that month's interest on the loan. What happens then? The unpaid interest that has accrued is added to the loan principal. The principal can actually grow larger, and as interest due is calculated on the loan principal, the interest due will increase, as well. Interest rates are currently near all-time lows and are sure to increase. A buyer who continues to make minimum payments on an option ARM will find that the principal on the loan is actually increasing over time! This is known as negative amortization.

In a negative amortization situation, only bad things can happen. The lender can require refinancing under certain conditions stated in the loan agreement. The buyer may find himself unable to pay the loan and may have to default. And the lender could find himself holding a note that is worth far more than the house that it represents.

The option ARM is a loan that is best suited to investors and homeowners who only intend to keep the home for a short time. It is not a good choice for anyone who may be using it to buy more home than he or she can afford. Unfortunately, that describes a lot of buyers who are taking out this type of loan. Anyone who is considering a home purchase should be very careful if this type of loan is offered, as it could leave you both bankrupt and homeless.

©Copyright 2005 by Retro Marketing.

Charles Essmeier is the owner of Retro Marketing, a firm devoted to informational Websites, including End-Your-Debt.com, a site devoted to personal bankruptcy, debt consolidation and credit counseling, and HomeEquityHelp.com, a site devoted to information regarding mortgages and home equity loans.

---

Home Mortgage Lenders - How to Find A Good Mortgage Broker Online

Mortgage lenders have set up shop online, but they aren't... Read More

Mortgage Research Good News for House Buyers

Figures from the Council of Mortgage Lenders show that in... Read More

Bankers Dont Want You to Know That You Pay for Your No Cost Home Loan Forever

With mortgage rates continuing on a downward trend, the competition... Read More

Mortgage-Refinance Treachery: Avoid Mortgage Bankers and Brokers Biggest Trick -- The Sales Pitch

What the average homeowner or home buyer fails to realize... Read More

Home Equity Loans ? A Big Benefit Or A Big Mistake?

When the bills are piling up and there doesn't seem... Read More

Home Equity Loan ? With a Reverse Mortgage, Your Home Pays You!

The home equity loan has become quite popular in the... Read More

Home Loans -- Federal Regulators Warn Lenders to Be More Careful

Federal banking regulators have recently expressed some concern over the... Read More

Bad Credit Mortgage Loans Online - How Your FICO Credit Score Can Affect Your Loan Approval

When applying for a mortgage loan when you have a... Read More

Thinking About Refinancing Your Loan?

Refinancing your home or property is a big decision that... Read More

Home Mortgages: Up, Up and Away!

Refinance NOW-before it's too lateIf you haven't found the time... Read More

Refinance Your Home Mortgage Online

The largest financial obligation most people ever take on couldn't... Read More

How I Became a Hard Money Lender

Unlike other investors, my venture into real estate was a... Read More

What is a Current Account Mortgage?

Current account mortgages are fairly new to the sector. They... Read More

Home Loans For People With Bad Credit - Tips To Getting Approved Online

Buying a home with bad credit doesn't have to stop... Read More

Poor Credit Home Mortgage Loans - The Role of the FICO Score

If you have bad credit history and are looking to... Read More

Save Time With a Bridge Loan

Why You Need a Bridge LoanYou have to move fast... Read More

Home Equity Loans Online

If you are in the market for a home equity... Read More

Mortgage Questions to Ask Your Lender

Buying and financing a home today can be overwhelming. Here... Read More

Refinancing Mortgage Loan - Get The Lowest Interest Rate You Can When Refinancing

Refinancing can be a very simple process. You fill out... Read More

Gearing Up for Bad Credit Mortgages

Mortgage would have never happened, had mortgages been a no... Read More

Shopping for A Mortgage? Do Your Homework First

If you happen to be shopping around for a mortgage,... Read More

Tips For First Home Buyers On Getting Home Loans

Buying your first home will likely be the biggest and... Read More

Mortgage Soup

Looking for home mortgage loans can get confusing with the... Read More

Using a Calculator to Assess Your Loan

Buying a house is a very important step in your... Read More

Top 5 Methods to Manage Your Home Equity

As your home appreciates in value, you gain equity. You... Read More

Guide to Remortgages

Here is a useful guide to remortgages. What is a... Read More

Lesser Known Facts About Home Equity Loans

Refinancing your debt via a home equity loan shifts your... Read More

Helpful Mortgage Advice

Mortgage advice overwhelming you? Many people get advice from everyone... Read More

Build Your Own Dream House!

So you're thinking about building your own house, are you?... Read More

Home Loans and Mortgages ? The Selection Can Be Bewildering

For years, when someone wanted to purchase or refinance a... Read More

A Simple Way to Save Thousands on Your Mortgage Charges

How many times do you check you restaurant bill? If... Read More

How to Compare Fixed Rate Mortgages and Adjustable Rate Mortgages

There are many types of mortgages, and the more you... Read More

How To Determine The Price Of Your Home

Why is it that some homes sit on the market... Read More