If you visit us regularly, you know about adjustable rate mortgages; the pros and the cons. You may not, however, know about Option ARMs. This clever lending product is what made it possible for many not-so-wealthy people to afford very expensive homes in the Bay Area. In a nutshell, Option ARMs offer different payment options. The first option is a "full" payment of interest and principal. Option two is an interest-only payment. Option three is some amount less than the monthly accruing interest; a negative amortization payment.
Option three has the potential for big problems.
When you aren't paying even the total interest on your loan, you better hope your home's value is going up. Otherwise, you have no chance to build equity. For the last 2-3 years, as California home values have fallen, borrowers choosing option three have been falling farther and farther behind. Many are now well "upside-down" on their homes.
And that's not the scariest part. Like all ARMs, Option ARMs have lower initial rates. After a few years (usually three or five), the rates re-set. This means that all three payment options can go up. Borrowers who could only afford the negative amortization payment find themselves struggling to pay even that amount. And guess that happens?
Default. And guess what follows default?
Foreclosure.
Read this article from the Chron for some stats. To us, the scariest number is not the 50,000 or so Option ARMs floating around the Bay Area. No. It's the 94% of borrowers who've been making the minimum payment.
It will be interesting to see if another wave of foreclosures is on the horizon.
Tuesday, September 22, 2009
Subscribe to:
Posts (Atom)
