What is the "Option Arm" loan program pros and cons and how should it be used to your advantage?

Answer 1

IMO I think option arms are bad products specially on a primary house. If used should only be used on investment properties..Pro low payment...

Cons..Balance of mortgage will go up tremendously.
IF your house doest appreciate at least 8-10% a year you could owe more than what you borrowed if you did 100%

Answer 2

This is the sort of product that has helped fuel the current foreclosure frenzy. An Option ARM really has few benefits. If you plan on selling for a profit and you know for certain the home will apprecitate immensely in 12 months or less - it may be a good idea as you can pay less than interest due monthly. Same thing if you are getting a home at less than the actual value. Or if you know you will be receiving a large raise and can handle future higher payments.

Beyond those situations you and all of your friends need to run like hell away from an Option ARM. It is a hybrid loan. A BAD hybrid loan.

Answer 3

The only advantage to an "option ARM" is low initial payments. Everything else about them are negative.

Typically the payments are not high enough to cover the interest due, so the loan balance actually increases every month. You have the "option" of paying more each month to avoid going into a negative amortization situation.

The "ARM" portion of "option ARM" means Adjustable Rate Mortgage. Of critical importance is the lock-in period for the initial rate. It's insane to take less than a 3 year lock and 5 or 7 make much more sense. Many have no lock period and the rate can rise at any time after the first month.

Option ARMs are ONLY for financially savvy buyers who intimately understand the risks and are financially able to make far higher payments in the future once the rate floats. Everyone else should avoid them like the plague!

You'll probably get a few responses from brokers who will rave about them; maybe even entice you to contact them. Before you do that, consider the source!

Answer 4

Con's- not having the OPTIONS of the Arm being fixed for 3 or 5 years

Con's- Paying the minimum payment and increasing your outstanding loan balance as a result

Con's- Hard prepayment penalties

Con's- Possible declining market values just when your arm is about to adjust.

Pro's- Having the flexibility to make a 15 year payment of principle and interest or a 30 year payment of principle and interest (when you have a good month, throw more towards prinicple with a 15 year)

Pro's- Having the fixed Option of making an interest only payment.

I generally discourage my clients from getting the traditional option arm if they are adamant about having this program. I also tell them to stay away from the teaser rate/minimum payment unless ABSOLUTELY necessary (low cash flow).

Answer 5

Huge question, to many answers to put in a note. Lots of pros and some big cons. The new hybrid option arm that is fixed at around 7.75% for the first 5 years is the safest one out there. First Fed has one of the best.

Answer 6

They can work well when there is ongoing heavy price appreciation in your market.......Making that minimum option payment over and over can lead to negative amortization on your loan! Your loan principal loan balance could increase. These are very risky loans in my opinion.

Answer 7

http://mortgage-x.com/library/option_arm.asp

look out for super low teaser rates only good for 1 year and for major hikes thereafter....also, look at origination costs, they will send you a "good faith estimate" when you apply ..read over and address all costs....if you own your home for a short period and origination costs are low its worth it