What are Option ARMs?
Option adjustable rate mortgages (ARMs) are adjustable rate mortgages which offer several different repayment options to borrowers. These mortgages are often touted as being highly flexible and useful for people who are trying to buy a first home, especially in the case of people with incomes which are growing. However, there are some serious dangers to an option ARM which should be carefully considered before committing to this type of loan. As with other adjustable rate mortgages, the interest rate on the mortgage changes, rather than being fixed. This means that when interest rates go down, so does the interest rate on the mortgage, but when interest rates rise, the mortgage interest rate also goes up. To compensate for the changes in the interest rate, the payments are periodically recalculated or “recast” in banking-speak, which means that the amounts of mortgage payments can vary from year to year, and sometimes month to month. With option ARMs, the borrower has an option each mo
Options ARMs are a type of adjustable rate mortgage. They are known for the fact that introductory payments and interest rates are (or rather, were, before it became next to impossible to get them) ridiculously low. The “option” comes in when you can choose to defer part of your principal payments, and even some of your interest payments, until further down the road. You can probably see where this is going already. Deferment means that at some point you have to start paying. And that is where the trouble is starting. The Salt Lake Tribune reports on option ARMs: The initially low monthly payments on these exotic ARMs enabled more people to buy homes and enticed other borrowers to refinance their existing mortgages to free up cash for other purposes. Now, the exotic ARMs are tormenting overextended homeowners, reckless lenders and shortsighted investors as the teaser rates rise, dramatically driving up monthly loan payments against a backdrop of declining property values. Not that you
