Are Option ARM loans REALLY as bad as everyone talks about?

Question

We are looking at this option to better utilize extra cash to pay off some consumer debt (that cannot be included in the refinance) but people are so negative about it. We are going with an option ARM and WILL be making the full amortization payment (based on a 40 year loan). We are going to be using the 12MAT program (I can't seem to get enough information on this) but it appears to be relatively stable based on the 12-month Treasury Average. I understand about the "interest only" payment and are fully avoiding that. We can't go with a decent fixed rate due to our income to debt resulting in a 680 FICO score. Will our plan, we should be able to pay off most of the consumer debt in 2 years then refinance into a fixed rate. Does this sound like a realistic plan. With paying as we will (fully 30 year), does this loan have a chance for negative amortization? Believe me, we have learned our lesson on using credit cards and taking out loans.

We own our house, valued at 700K and have 1 mortgage, HELOC and the consumer debt. We want to combine the 1st and HELOC to lower our payments to start paying off our debt (which cannot be added to the refi). The lender will let us borrow up to 95% of the value of our home. Again, what is so bad about Opt ARM when you can make a fully amortizing payment?

Answer 1

Be very careful of what you are getting into. I am a mortgage broker myself and know something about how these option arms work. While the media are declaring that the subprime loans are the problem for our housing crisis, I believe the option arm loans are a big contributer, not just the 2/28 or 3/27 loans. Normally an option arm has 4 options: 15 year fully amortized, 30 year fully amortized, interest only, minimum payment. The interest only payment is not bad as long as you make sure you pay exactly what they tell yo for the interest payment. The biggest danger is in making the minimum payment. It depends on the size of the loan and the "true" interest rate (index+margin), which is adjustable. The true interest payment may be around 7% but the minimum payment only requires you to pay somewhere between 1-3%. The extra 4-5% that you are not paying gets added to the loan balance which can be $1,000 or more per month. The biggest danger is the re-cast amount, which is normally 115% or 110% or the original loan amount. So for instance, a $500,000 loan would have a recast amount of $575,000 (115%). If the minimum payment was 2.5% the paymment would be $1041.66/mo, and if the "true" interest rate was 7.5% the payment would be 3125.00/mo just to cover the real interest amount due each month. The difference between the two is $2083.00. That $2083 is the amount short to cover the real interest due and it adds to your loan balance. After a year your loan will have increased $24,996! Remember your original loan was $500k and the recast amount is $575k. In three years you will hit the recast amount. At that point the loan will be "re-amortized" for the remaining 27 years at the true full amoriztized (not just interest only) interest rate (whatever it may be at the time because it is adjustable. But just say it was still 7.5%. Now your loan is $575,000 for 27 years remaining, the payment required will be $4144.22. The new payment is 4X what the original "minimum payment" was. Be very careful. Loan officers love these because they show you how much you can lower your payment and they make a very good commission from them. I have never done one myself after I explained to my clients the potential problems. Don't make the minimum payment unless you know exactly how much you are going to be adding to your loan each month. Good luck to you!

Answer 2

The problem is buying more house than you can afford with adjustable rates. You have consumer debt and are already thinking of refinancing before you even buy.
Refinancing is very expensive and in two years you may not have a job or your credit could be trashed for some reason, you house value could be down. Buying a house on an ARM for 40 years especially when you have the option to pay interest only is very high risk.

Answer 3

Sounds like you have it backwards. You are badly in debt and want to buy the house NOW?!??!!


Pay off your debts, THEN buy the house.


NEVER go for an ARM. What happens when the rates go up? (we'll refinance) Well, what if you get injured or lose a joba and CAN'T refinance? What if your plans fall through and you DON'T pay off the debt and CAN'T refinance? What if both cars break down and the roof leaks?

Get in a good financial position with a good credit score first, THEN think about buying a house.



Note that you don't BORROW your way out of debt. You don't do a REFI to pay off credit cars. You really want that anniversary dinner you charged last year to be payed off over the next 15 years?!?!?! YIKES. Very poor financial judgement here.

Answer 4

bottom line: they only offer bonuses or CLRP when they have a hard time getting recruits. since they have to turn away fully qualified people now, they no longer have to offer either incentive. Navy stopped offering them many months ago. what is and is not available changes daily. if all you want is a bonus or loan repayment, you want to join for the wrong reasons anyway.

Answer 5

They are only bad if you want to keep your home .
If you don't mind being homeless in a few years ,
(or going back to an apartment )
Go for it !

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