Mortgage News: Option ARM / Neg Am Loans Grilled by BusinessWeek

Tuesday, September 05, 2006

Option ARM / Neg Am Loans Grilled by BusinessWeek

Option ARM / Neg Am Loans Grilled by BusinessWeek

In case you haven't heard the buzz yet about this BusinessWeek article regarding the popular "Pay Option ARM Loans" with artificially low rates, it may be worth it for you to read it now. Especially if you think you may have one of these types of adjustable rate mortgages. If you do have this type of mortgage check this pay option arm / pick a payment mortgage calculator to review the real numbers.

The pay-option ARMS will not cause the most pain in the short term because the recast period is fairly long and the payment adjustments are minor (although the accumulated negative amortization is not) as indicated by this pay-option arm mortgage calculator.

The one to fear is the 100% 2/28 interest only loans (often done as a piggy back loan 80/20). When these adjust for the first time, they have the largest monthly payment adjustment. Here is a 2/28 adjustable rate mortgage calculator. Running a scenario of: 300,000 that started at 5.5% interest only (rate about two years ago), the very first payment adjustment would jump the payment from $1,375 to $2,139, a $764 adjustment that represents and increase of 55% in the payment. Combine this with the fact that most people who obtained this type of mortgage probably did a "stated income" loan which is also falling out of favor with the mortgage lenders and these people will not be able to refinance due to their income to debt ratios and possibly not be able to sell, leaving no option but foreclosure or short sale.

Do you have one of these two types of mortgages? If so what are your thoughts as an actual borrower? Afraid? Already refinanced? Not Sure?


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