According to data from Loan Performance, one in three homeowners refinancing today is choosing the financially riskier Interest Only and payment options ARM's loans.  For years I have provided both loans to my clients.  I love interest only loans for financially responsible people.  I like the idea of spending the least possible on mortgage debt as long as the extra money is being used to improve there financial position more then the increased equity they would have paying down there mortgage. 

The Option Arms are a totally different monster.  I have provided those loans for two types of clients in the past.  The first would be real estate investors.  This is the cash flow king loan in my opinion.  It will allow the highest cash flow on a monthly base and carries a much higher risk.  I also think it can be a good short term loan for someone who is starting a business or has some short term debt they need to focus on.  In my opinion this is a short term solution for anyone who isn't using it for rentals. 

I hear so many stories of irresponsible lenders that sell these loans to people who are looking for the lowest payment so they can afford a bigger house.  This is a really risky move for most clients and we are already seeing a large foreclosure rate on these loans.  Most of the lenders giving these loans do not educate there clients on how these loans work (in my opinion).  I believe (based on news reports and my personal experience) many of these people in these loans are unaware that there true rate is in the sevens and changes monthly.  Many don't realize that the payment will increase quickly and they will be backwards with equity. 

In my opinion lenders who promote this as a super low rate choice for new homebuyers (which unfortunately we have one of the largest violators here in Michigan) should be investigated.  This is were being a professional loan officer (keyword Professional) has its responsibility to educated and counsel clients.  Don't get me wrong, it isn't that I don't think there is a need for these programs. I just believe it is up to the lender to make sure the clients knows what they are getting into.