Option ARM Mortgages Aren't Necessarily Evil.

Tuesday, January 5, 2010 , Posted by Johnny Fuery at 4:22 PM

Originally Published 2007-09-25 23:59:42

Check out this recent BusinessWeek article:

Surprise: Toxic Mortgages are the Best

The most pertinent point in the article, in my opinion, is this. Note the bit about "good [financial] self-control":

The option to pay less than the minimum monthly interest owed on the loan is valuable for people with good self-control whose income fluctuates a lot. They can pay just a little in lean months and catch up in fat months. It's good for lenders, too, because they don't have to foreclose on people who fall behind, which is an expensive process. People with steady incomes don't need this feature, but having it doesn't hurt them.

There's another point, too, which I use to rationalize my own usage of Option ARM (with potential negative amortization) loans. If your appreciation rate is equal to or greaer than the the negative amortization amount, you're still in the clear. In fact, you've now used a good method for obtaining leverage (using other people's money to make money), and made it an obscenely amazing one. The risk goes up dramatically, of course, but if you've got that "financial self-control" magic down, you can handle the juggling act.

(And, don't forget the the tax benefits of holding real property.)


On 2007-09-26 08:57:04 Shane said:
Since option ARMs are somewhat targeted at investors, by requiisition of a higher credit score and 20% or more down, it seems to me that it's a great option for managing cash flow. The problem started when Joe Public started using this vehicle in conjunction with a low teaser rate (which is the real problem and akin to saying that you qualify to borrow this much money for a few months then we hope you have a plan B) and never even planned on paying more than the minimum payment.

On 2007-10-06 15:51:17 Las Vegas Real Estate Expert said:
You might change your opinion about an ARM when the rate continues to go up. I've seen people have their mortgage payment double after the introductory period. Shane hit the nail on the head, quite a few people got these as forever loans, not just interim financing. Now its coming back to bite them.

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