Option Arm The Worlds Most Dangerous Mortgage

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.

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