March 22, 2010
Option-ARM Loans
What is an option-ARM loan?
An adjustable-rate mortgage allows borrowers to make a minimum payment on their mortgages which barely covers the interest payments.
The four major types of paymtent options include:
Minimum Payment: 12 month payment with initial interest rate, then interest rate changes.
Interest-Only: Avoids deferred interest and not available if the payment is less than the minimum payment
Fully Amortizing 30-year Payment: Principle and interest are paid. Each month the amount due depend on the prior month’s fully indexed rate loan balance and remaining loan term.
Fully Amortizing 15-year Payment: Pay off your loan in a short amount of time, that is, if you can afford the higher payments. This way you pay half the interest amount compared to a 30-year mortgage.
Reports show that most of the loans made between 2005 through 2007 were option-ARM loans with minimum payments. These types of loans have terms that last about three to five years and are now expiring, which is likely to cause another major wave of properties defaulting. Their mortgage will no longer be nearly the same amount they have been paying for the past few years and this will cause many to default. An estimated 900,000 borrowers with the ARM option will lose their homes. Those who can afford to pay the increase will most likely walk away due to the 46% decrease in their property’s value.
ARM loans make up only 2% of the home loans which contributes about $300 billion of the loan balance. The downfall of the ARM loans is expected to drastically increase the amount of foreclosures. Whit more modification programs becoming available and low interest rates for the time being will help decrease the default rates.
