Option ARMs Continue To Weigh Heavily

Option ARMs Continue To Weigh Heavily

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Exotic home loans come due

There is a silent drag on the housing market today and it isn’t depressed housing prices, foreclosures or the ending first time buyer’s credit program. Option ARMs—adjustable rate mortgages—continue to make recovery difficult as thousands of these mortgages reset every week.

Customized Payments

home loanOption ARMs or some variant of the same have been around since the 1980s, but became popular in more recent years. These out of the ordinary mortgages were designed to permit home buyers to close on a home with very little cash and select, on a monthly basis, how much to pay. They could choose interest and principal, interest only, or a minimum amount less than the interest due.

According to CNN Money it was the third option chosen by 93 percent of homeowners leading many to owe more on their loans than what they borrowed. Yes, a hard lesson in negative amortization was being realized by affected borrowers, but that lesson continues today as even more loans reset.

Introductory Period

Option ARMs typically carry a five year introductory period where borrowers can tailor their loans accordingly and enjoy lower than market mortgage payments. Once that period has ended, borrowers can either refinance or accept the higher, fixed rate kicks in.

But tens of thousands of homeowners are not in a position to refinance as their homes have lost value or they’ve lost their jobs. In some cases the reset period has kicked in sooner if the loan-to-ratio value climbed above 110 to 125 percent. Suddenly, some homeowners have discovered that their monthly mortgage payments have increased by hundreds of dollars per month.

Home Values

Compounding the problem is that affected homeowners may owe more on their homes than what they originally borrowed plus their home values may have dropped significantly since they first took out their loan.

“It’s going to kill off housing,” warns Patrick Pulatie, CEO of Loan Fraud Investigations, a predatory lending audit firm. “We have pretty close to 500,000 option ARM payments going higher in California over the next couple of years. The impact of the higher payments will be devastating for homeowners who are having trouble now making ends meet.”

Those California loans when added to an undetermined number of similar loans across the United States could scuttle our economic recovery as a rash of defaults lead to increased foreclosures and a burgeoning stock of homes to push housing values down even further.

Adv. — Visit SayLending.com to explore your financing options.

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Categories: Home Financing, Money News

About Author

Matthew C. Keegan

Matt Keegan is a freelance writer and editor as well as publisher of "Matt's Musings", his personal blog. Matt covers campus, consumer, business and financial topics on various websites and blogs, and has been published in the "Houston Chronicle", "Sam's Club Magazine" and "Wisconsin Golfer".