arm, interst only... just confuse?

Question

So.. they offer me a arm loan with 1.9% fixed for 5 years. I know is less than interest payment... but they said is fixed, with no prepay pennalty and I can refinance whenever I want is that true?

well the situation is I have a house already, but my husband is been relocated and selling know is kind of difficult, so if we can not sell our current home we were looking for other options, with this I can keep my house for 1 more year, wait for the market to speed up, and aford to make 2 mortgage payments.. The fixed 1.9 is for 5 years but I can't refinance w no prepayment pennalty as soon as I sell my house!!!What u think!!!

Answer 1

An option ARM is good for people only keeping their house for a short time. Here's how it works:

The start rate is generally a "teaser" rate, a very low interest rate, generally good for one to three months. It is also the rate on which your minimum monthly payment is figured.

Then you get to choose how to make your monthly payment. Your Options would be:

Minimum Option Payment
This is the payment that is typically fixed for at least one to five years. It is less than a full interest payment. On a $200,000 loan, at a start rate of 3.95%, the minimum option payment would be $949.07 per month.

Interest-Only Option Payment
As it implies, the payment is "interest only," meaning it pays only the interest due, no principal. At 6% interest on a $200,000 loan, this payment would be $1,000 per month. The interest rate adjusts monthly.

Fully-Indexed Option Payment
Adding the index rate to the margin equals the fully-indexed interest rate. Amortizing the loan for 30 years will compute the fully-indexed payment. This will adjust every month. At 6% fully-indexed on a $200,000 loan, the payment would be $1,199 per month. The index rate adjusts monthly.

Index Rate
Think of the index rate like the bare-bones minimum return on an investment. It's a rate based on a variety of averaged returns, and is conveniently published monthly. The four basic indexes are:

1. Monthly Treasury Average
2. 11th District Cost of Funds
3. London InterBank Offered Rate (LIBOR)
4. Cost of Savings Index (COSI)


Many Option ARMs require recalculation or re-amortization every five years. Before the 61st payment, unpaid interest is added to the loan and recalculated. If you have paid large sums toward principal, recasting will lower your future loan payments.


If you need any more help let me know. I have been a mortgage banker for a while now and may be able to assist you. Feel free to e-mail me any time.

Answer 2

Actually everyone is bit confused, here is how it works:
You have been offered an Option ARM loan, at so called 1.9%. The only portion that is fixed for 5 years is the fact that your minimum payment will be as if it was 1.9% APR, however the actual interest rate will be higher, and probably changing every month. So, the shortage will be added to your principal balance of the loan. Do not go for it. Even if the Real Estate market goes up in a year or two, you probably will not realize any profit from having held the house longer as all that extra money will be wasted on extra interest, closing costs and other junk. But headache from having an investment property in another state or town is unbelievable.
I am a licensed real estate agent and a loan officer, so I know what I am talking about and here is what I suggest:
1. It could be a good idea to keep both houses for some time, if you are financially sound and can easily deal with this.
The fact that you have to consider option arm, means that you can not afford two houses easily, so forget it. Just have discipline to admit you can not deal with this right now.
2. Having decided that you can't keep two houses, you simply need to sell your house for whatever you can sell it. The market is not that much of a seller's market, but it is not dead. The secret of selling in any market is to set the right price and make sure you offer enough commission to cooperating brokers so they are interested in bringing their clients.
Talk to a few agents and ask them what they think of the value of your house, do not jump with the one who offers the highest asking price -- they will say whatever just to get you to list. Get a realistic price and ask a couple thousand LESS. If you set the right price, the house will sell faster and closer to asking price.
When you negotiate with a listing agent, ask them how much they are planning to offer coop commission to other agents. Make sure it is at least 3%. It does not have to be half of what you pay to your broker, there is no law that stipulates how commissions are split.

Now to answer others: there is generally nothing wrong with ARM loans, but there is a lot wrong with option ARM. Sometimes it makes sense to get 3/1 or 5/1 ARM, if the rate is lower than 30 year fixed why not? You enjoy lower rate and watch the market, rates go up and down every 3-5 years, so you can catch another wave down and refi for another 3-5 years later.
But I don't believe there is any good reason ever to get an Option ARM with negative amortization that one is a guaranteed loser.

Good luck.

Answer 3

Interest only can end up paying you more in the long run. Be very careful with these loans.

The fixed 1.9% ARM sounds almost to good to be true. What will be the interest rate after the 5 years? Is there a balloon payment after the 5 years? One more thing to think about ... what fixed rate mortgage can you qualify for now? Are you willing to take the chance of being able to get a good rate in 4 years when you go to re-finance? Make sure you read over all of the fine print ... and get everything in writing.

Was this a general offer or did you apply for the loan? If this was not a pre-approval or they did not look at your financial situation prior to the offer, then it is not really worth much.

Hope this helped.

Answer 4

Dear confused, it sounds like you have a bit of a mess. It sounds like the mortgage you are talking about is called a 5 year pay option arm. Which just means that the percentage 1.9% they offered you will not change for 5 years. However the arm means that you will have to refinance within 5 years or after 5 years, which ever you need to do first. And the fact that you can refinance anytime that you want to is not excactly true either, because any lending company will tell you that it depends on your credit report. Is there any foreclosures? They look at your debts , and they also look at what your current credit score is. Alot of companies out there like to lie to people to get there business. So they will tell you just about anything to get you to close the deal. My philosophy with mortgages or financing is always read the fine print on the closing papers. Everything before the closing papers does'nt really matter, but once you sign on the dotted line at the closing table , you get whatever the paper states!

Answer 5

NEVER, EVER, UNDER ANY CIRCUMSTANCE GET AN ARM OR INTEREST ONLY LOAN!

Was that clear enough? If there was an advantage in it for you, they wouldn't offer it. Get a 15 year FIXED mortgage only. In 5 years, the rate will jump up to well over what a fixed rate is, and fixed rates are climbing up from a 40 year low.

Chances are, if you refinance in 5 years to a fixed rate, you'll be paying a higher rate than what is available today, you won't be building equity, and if you're in a market that is cooling like so many are, you'll owe more in 5 years than what you're borrowing today. ARMs are terrible loans, and interest only is the worst loan for the consumer that has ever been invented. Total ripoffs.

Answer 6

Yeah, if you want it. You'll be accumulating interest over and beyond the principal balance on your mortgage, so that in a year, if you make minimum payments, you'll owe more than when you started. That's OK if you don't mind eating away at some equity to get a low monthly payment, and your credit is strong enough to allow you flexibility when you want out.