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Lou Davis asked...
Q: "Do you have an opinion on the option ARM's that many homebuyers are using?"
A:
I'm not a mortgage expert, but I have personally had anARM mortgage. By using the product, I gained a personal understanding of them, which I use to advise clients, and will share with you.
There are many variations of ARM loans, or "Adjustable Rate Mortgages". The easiest way to look at an adjustable rate mortgage is to know that the rate for your loan, or "interest rate" will change within a specified amount of time.
Adjustable rate loans can be confusing because for a certain period of time, you will pay a certain amount for your property. The period may be 1 year, 2 years, or even 10 years. After that year, 2 years or 10 years pass, you will owe a different (traditionally higher) amount each month. It is very important that you understand this, and know exactly what it means in terms of your payments each month for the life of the loan
There is a slight variation with an Option ARM. The Option allows you a very low payment, initially, with an option to pay different amounts each month depending on your financial situation. This loan allows you some freedom as you can pay based on your income for the month. Sounds too good to be true? Well, there's always something to remember with adjustable rate loans. They adjust!
There has been a lot of scrutiny, and a general distaste for ARM loans over the last few years, as homeowners weren't aware that their loans would adjust. Some property owners would look up, and their payments were simply unaffordable.
Here are some important points to remember when you begin to shop for a real estate loan, and are interested in, or offered an ARM, or Option ARM.
1. Understand.
An adjustable rate loan will adjust. This means the rate you have right now, will change at some point in time. When the rate adjusts, it will likely go up. It can double. It can triple. That means the amount you are paying for the property will increase. Ask your loan officer to explain it to you. Take notes. Read articles, and research on the internet. Ask a friend, a neighbor or your banker. Do whatever you need to do to understand the difference between an ARM and a traditional fixed rate loan. Be sure to understand exactly what that will mean in dollars, and cents.
2. Anticipate.
Your Adjustable Rate Mortgage will adjust. Be sure you know exactly when the loan will adjust, and make a decision before you sign up for the loan about how you will react. Do you know for sure that you are moving in 3 years? Will you complete school, and have more income in 5 years? Are you confused, and have no idea what you will be doing next week, let alone in 10 years? These are questions to ask when you are considering a loan that will change your monthly payments for a property after a certain number of years.
When that time is coming near for your rate to adjust, will you keep the loan, and pay more for your property? Will you refinance, and get out of the loan? Will you sell the property, and move? Keep in mind that your credit score, or financial situation may change. It may change for the better, or change for the worst.
3. Choose.
Once you understand the details of an ARM, and anticipate the action you will take once the loan is due to change (or adjust), you can make an educated choice. be sure to choose a loan that you are comfortable with, and of which you have a complete understanding.
With knowledge of the product, a realistic look at yourself and your future, and the ability to comfortably choose a loan, I believe you can finance with an ARM and be happy. It's only when you have no idea what you are getting into, and find out that your payments have doubled unexpectedly that this type of loan could be a disaster.
This is very educational. It is important for people to read everything they sign and understand what they are getting into. Excellent advice.
Posted by: Kimberlee Morrison | July 3, 2007 9:24 AM | Permalink to Comment