More Reasons To Steer Clear Of Option ARM Loans
Once again, I'm here to remind you good folks of the pitfalls of the Option ARM home loans that have become so very popular these days. Any home owner considering an Option ARM needs to know as much as possible about the downsides of this particular loan, and it's information many lenders won't tell you up front.
Remember that no matter what it's called, any home loan that allows you to make a "minimum payment" amount at a very low interest rate (typically 1.00% to 4.00%) for a predetermined period and contains a provision for negative amortization is an Option ARM loan, or as we industry peeps call it, a "neg-am" loan.
Worse yet is the advent of the "extended" Option ARM — a loan that now gives you the option of making minimum payments for up to 5 years. Without a doubt, this is the very worst possible option one could want, particularly when used as part of a total loan percentage in excess of 75% of today's market value of your property, and especially a very bad choice when used as part of a 100% financing package.
Why? Because in an uncertain real estate market (wherever it may be, but I'm referring specifically to California), where prices are topping out, appreciation is slowing, and resale homes are slow to sell versus new construction, the last loan you need is one that can have you owing more than you started with and a home that's worth less than you bargained for in the future. But there's more…
You could find yourself stuck in an Option ARM loan with a hefty prepayment penalty if you try to refinance out of it–so much so you may not have the equity available to refinance at all, or be forced to pay cash out-of-pocket to close a new loan. You could find yourself owing 10%, 15%, or 25% more principal than you started out with. You could see your payments soar if you reach your "negative cap percentage" early. You could find it difficult to obtain a second mortgage behind your Option ARM loan, or one at a reasonable interest rate. Subsequently taking cash out of the property via a second mortgage could be limited by a percentage of the value, or inclusive of the potential negative cap percentage, meaning you'll get less cash than you want or need.
Any or all of the above items should get most normal-thinking adults to really consider whether an Option ARM is all that great of a deal. And, of course, if your sole purpose for choosing an Option ARM loan is because it is the only loan that you can afford (by making only the minimum payments), you're likely headed for financial calamity or ruin in the near future if your income doesn't increase enough to cover the rising costs, or your other debts get out-of-hand.
