Business Week’s cover story of September 11, 2006, “Nightmare Mortgages,” highlighted key problems facing some residences with certain adjustable and option rate mortgages. The story discusses “The promise of the American Dream: A home of your own at rates and payments anyone can afford,” and goes on to say, “What banks don’t tell you is why they love option ARMs. No matter how small the initial payments, full revenue gets booked now. Meanwhile, borrowers owe more every month. For many, the trap has already begun.”

In a nutshell option ARMs are adjustable rate loans that offer four different pay options each month. A 30 year amortization payment; 15 year amortization payment; interest only payment and a minimum payment (deferred interest or negative amortization) The lowest rate is the minimum payment, which can be fixed for a year. This is the teaser rate at 1.99%

These loans can be beneficial for a few savvy borrowers looking to increase cash-flow and possibly invest their equity into other means. However this is rarely the benefit that borrowers realize. All too often these loans are used to put off the inevitable; to bring down the payment on a home that they may no longer be able to afford. However you’ve got to pay the piper now or later and it always cost more to pay later. These loans have become popular in areas that have seen aggressive increases in real estate values, mainly the west coast. Although option ARM’s are available here they have not been widely accepted in New England.

While the Business Week article isn’t perfect, it makes consumers aware of critical issues they need to know before they choose a loan product. Most importantly, you cannot shop your loan based on rate and the quoted payment amount alone.

Rate and payment are important but there are many other factors to choosing which loan is right for you. Many consumers ask for the lowest rate (1.99%) and may end up owing a higher balance two years from now than at time of origination.

The consumer is better served by meeting with a mortgage consultant that will give them the options they truly qualify for. They must ask what the TERMS of the loan are.
This way if a loan is an adjustable loan, they need to know if there is a temporary fixed period, when and by how much their interest rate may adjust, if there are any pre-payment penalties and what options they may have to refinance at adjustment time.

“As a responsible loan officer, I am proud to stand with others around the country to provide increased consumer protection and education.” Says Vincent Savino. “A home is typically a family’s largest investment, and responsible loan officers provide the critical information people need to make informed financing decisions.”

Many times unscrupulous lenders try to trick consumers with low introductory rates and payments. Many find out after the fact that their payments aren’t even covering their interest payments. After a year or two of making their payments every month, many homeowners actually owe more on their home than they did the day they bought it.