I read recently that in the last quarter of 2006, 40% of new loans in Naples FL were OptionArm, or the 1% mortgages you hear about.  It will take about 3 years for the impact to be felt but many of these borrowers will lose there homes and destroy their credit.

The true cost of this product is inthe Mortgage Note which very few borrowers understand.  The true cost, which is the fully indexed rate is the sum of a margin, typically 2.5%, and the index, often the Monthly Treasury Average, currently over 5%.  Most borrowers are truly paying over 7.5%.  Most borrowers only pay the Minumum payment each month.  This payment amount is determined using the 1.00% number...essentially a made up number.  This puts them hundreds of dollars short of covering the accured interest each month.  This unpaid interest also starts to accrue interest.   Currently a 30 yr fixed interest only loan can be had for less than 6.5%.

 the real killer is when, after paying the minimum payment for 3-4 years the payment resets. It automatically will reset when the current balance hits 115% of the original loan amount.  This new balance, plus the fully indexed rate, and the number of years remaining are used to get the new minimum payment.  It is very easy to see payments doubling and tripling.

They are in serious danger when they are in a down market and have no equity to work with to refinance their home.  I predict this will be the news story headline in about 2.5 years when many of these start to automatically reset.

You cant build customers for life, if you let them kill themselves with a bad product. My clients get loans that fit their needs and loan amounts they can afford.