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That Damn Option ARM

By Ricardo Bueno

Mortgage and Lending with Diverse Solutions

December 05, 2007 02:33 PM

I've experienced this scenario one too many times...

Borrower: Mr. Bueno I'd like to refinance out of my current loan. You hear all the news today about low 6% and I'm holding 7.5%. So you must understand, something doesn't quite fit. Or am I missing something here?
Me: Well mam...
Borrower: But wait there's more. My payment has gone up $10,000.

Oookk...I see!

I'll explain briefly & without getting into too many details regarding the loan particulars...the borrower will incur a pre-payment penalty; on a $400,000 loan amount that's (6 months interest on 80% of the loan amount) $12,000. The $12,000 doesn't include additional closing costs for the new loan so often the borrower will experience some hesitancy in refinancing out.

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Kris Wales

Keller Williams Realty - Lakeside Market Center - Macomb, MI

Real Estate Blog & Homes for Sale search site, Macomb County MI

It's scary Ricardo. I have to wonder about personal responsiblity -and yet I am so very sorry for those this is happening to. You could say I have torn emotions about these scenarios.

Dec 05, 2007 10:33 PM

Ricardo Bueno

Diverse Solutions - Los Angeles, CA

Kris: I too get torn between the two but I will say that I feel a little bit more for those who had no idea what they were "sold." I feel a little less sympathy for those who knew EXACTLY what they were signing.

Michael: that is very true!

Dec 05, 2007 10:55 PM

Marc Brinitzer

Big Valley Mortgage - Sacramento, CA

Hey Ricardo,

I've been using neg am ARMs for 18 years. About one out of every 50 clients has a valid use for one. As a financial planning tool, they excel. No other loan gives you the ability to manage cash flow and income taxes at the same time. They are perfect for the sophisticated borrower with income that fluctuates significantly.

However, neg am loans when sold by the stupid or unscrupulous to the unsuspecting based on a 1% start rate and the fake , stupid-low payment are the most evil loan program ever designed. The most rotten apple in that bunch was the 5 yr fixed payment, option arm. Countrywide was the first to haul that crap out and push it. For more on that version, read a post I wrote at Lending Clarity, entitled The Five Year Fixed Payment Option ARM: The Devil at the Crossroads

Dec 06, 2007 11:18 AM

Hey Marc,

I certainly didn't mean to talk in a negative light about the Option ARM and those individuals successfully utilizing it...this is where I agree:

"They are perfect for the sophisticated borrower with income that fluctuates significantly"

Your latter point, for the obvious reasons, expresses my disgust over those who cheated home owners (though they're party responsible for reasons we don't have to get into).

Dec 06, 2007 12:21 PM

That Damn Option ARM

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