Jun 06 2007
Option ARM Risks and How to Protect Yourself
We are assisting another homeowner who fell victim to non-disclosure in the mortgage industry. This homeowner was contacted by an Option ARM guru who apparently sold them on a lower monthly payment. But again either the homeowner didn’t ask enough questions or the loan officer didn’t verbally disclose the risks. Disclosures should be explained upfront prior to choosing any recommended mortgage financing.
The risks of an Option ARM are two-fold. The first of these is the “recast” feature” which dramtically changes the payment. The payment during “recast”, usually in year 5, is raised to an amount that will allow the loan to be paid off within the remaining term, 25 years. This will happen regardless of the “payment” cap of 7.5%. The second once when the loan balance exceeds the maximum amount of usually 100% of the original loan amount borrowed. THe result is the same payment adjustment as described above. The loan must become fully-amortized. Either way the homeowner suddenly discovers a huge payment shock through “recasting” or negative amortization.
The best way to protect yourself from these risks is to ask questions. Why is the mortgage loan officer not showing other financing opportunities? Is the loan officer asking me questions about where I want to be in 5, 10, 20 years? What is the Margin for this or any adjustable rate mortgage? Always call a mortgage professional. I love answering questions and explaining upfront disclosures and risks prior to jumping into any mortgage scenario.